The Court of Justice of the European Union (CJEU) has strengthened equal tax treatment for cross-border workers residing in Switzerland (EuGH (CJEU), judgment of 17 September 2026 – C-223/25). According to the ruling, the Agreement on the Free Movement of Persons between the European Union and Switzerland and Annex I thereto preclude a provision that limits an income tax reduction for household-related services and tradespeople’s services to households located within the European Union or the European Economic Area. The decisive factor is that the services were performed in the Swiss household of an employed cross-border worker.
Tax Reduction for Work on a Home in Switzerland
Married Couple Residing in Switzerland
The main proceedings concern a married couple who hold both German and Swiss citizenship. The spouses lived in their own house in Switzerland. The husband was employed by a German company and had also maintained an apartment in Germany since 2015.
During the tax year at issue, 2019, he worked and lived in Germany during the week. At weekends, he regularly returned to the family home in Switzerland. In Germany, he earned income from employment and from renting and leasing property; he also received foreign income that was exempt from tax in Germany. His wife earned employment income in Switzerland.
Tradespeople’s and Landscaping Services in Switzerland
In 2019, the spouses commissioned several tradespeople and a landscaping company based in Switzerland to perform work on their joint house. They paid the labour costs on the basis of the invoices issued.
In her income tax return, the wife applied to be treated as fully liable to tax in Germany and to be assessed jointly with her husband. After the Finanzamt (German tax office) had assessed their income tax for 2019 by notice dated 26 February 2021 on the basis of joint assessment, the spouses applied for the notice to be amended. They sought the tax reduction under § 35a(2) to (5) EStG (German Income Tax Act) for the services performed in Switzerland.
The Finanzamt rejected the application for amendment and also dismissed the subsequent administrative appeal. It stated by way of justification that the work had not been performed in a household located within the European Union or the European Economic Area. The spouses then brought an action before the Finanzgericht Köln (Cologne Fiscal Court).
Requirements of § 35a EStG
Eligible Labour Costs and Maximum Amounts
§ 35a EStG permits a direct reduction in the standard income tax liability under certain conditions. The following limits apply to the services at issue in the proceedings:
- For household-related services, income tax may be reduced by 20 per cent of the eligible expenses, up to a maximum of EUR 4,000.
- For tradespeople’s services relating to renovation, maintenance and modernisation work, the reduction likewise amounts to 20 per cent of the eligible expenses, up to a maximum of EUR 1,200.
- Only labour costs are eligible in this respect; material costs are not.
- To qualify for the tax reduction, an invoice must have been issued and payment must have been made into the service provider’s account.
- In particular, the expenses must not already have been taken into account as business expenses, income-related expenses, special expenses or extraordinary burdens.
The Finanzgericht Köln considered the requirements of § 35a(5) EStG to have been met. Under the wording of the national legislation, however, the relief claimed was unavailable because § 35a(4) EStG covers only services performed in a household located within the European Union or the European Economic Area.
Purpose of the Territorial Limitation
According to the Finanzgericht’s observations, § 35a EStG was introduced in 2002 to promote regular employment relationships in private households and combat undeclared work in the field of household-related activities. For this reason, the reduction covers labour costs only.
In 2008, the provision was extended to households in other Member States of the European Union and in states that are parties to the EEA Agreement. Households in Switzerland remained excluded from this extension.
The Agreement on the Free Movement of Persons as the Standard of Review
Equal Treatment in Relation to Tax Advantages
The Finanzgericht Köln had doubts as to whether excluding Swiss households was compatible with the Agreement on the Free Movement of Persons. In particular, Articles 1, 2, 7 and 15 of the Agreement, read in conjunction with Article 9(2) of Annex I thereto, were relevant.
Article 9(2) of Annex I provides that employed persons and members of their families are to enjoy the same tax and social advantages as national employed persons and members of their families. The Finanzgericht therefore asked the EuGH whether those provisions preclude a national rule that denies the tax reduction in respect of a household in Switzerland.
Specific Features of the Interpretation of the Agreement
The EuGH first clarified that the Agreement on the Free Movement of Persons is an international treaty. It must be interpreted in good faith, in accordance with the ordinary meaning of its provisions and taking account of its context, object and purpose.
The Agreement is intended to achieve the free movement of nationals of the Member States and Switzerland on the basis of the rules applicable within the European Union. However, Switzerland is neither a member of the European Economic Area nor part of the European Union’s internal market. Consequently, the case-law concerning the internal market rules cannot automatically be transposed to the Agreement on the Free Movement of Persons unless the Agreement so provides.
Under Article 16(2) of the Agreement, the EuGH’s case-law from the period before the Agreement was signed must be taken into account. Subsequent decisions may also be considered insofar as they merely clarify or confirm pre-existing principles.
Classification as an Employed Cross-Border Worker
Dual Citizenship Does Not Preclude Protection
The German government had disputed the applicability of the Agreement on the Free Movement of Persons because both spouses held German as well as Swiss citizenship. The EuGH did not accept that argument.
Under certain conditions, nationals of a contracting party may also rely on rights arising from the Agreement against their own state. Their dual citizenship therefore did not prevent the spouses from asserting rights under the Agreement on the Free Movement of Persons against Germany.
Weekly Return to the Family Home
Under Article 7(1) of Annex I, an employed cross-border worker is a national of a contracting party who resides in the territory of one contracting party, is employed in the territory of the other contracting party and returns to their place of residence as a rule every day or at least once a week.
The husband’s family home was in Switzerland and constituted his principal residence. Because he returned there at least once a week, he met the requirements for classification as an employed cross-border worker. His additional apartment at his place of employment in Germany did not alter that conclusion.
His situation therefore fell within the scope of the Agreement on the Free Movement of Persons. Article 9(2) of Annex I also covered his wife as a member of his family who was jointly assessed with him for income tax purposes.
Disadvantage Based on the Location of the Household
The Tax Reduction Is a Tax Advantage
The EuGH classified the reduction under § 35a EStG as a tax advantage within the meaning of the Agreement on the Free Movement of Persons. Since § 35a(4) EStG makes the granting of that advantage dependent on the location of the household, it creates unequal treatment between households located within the European Union or the European Economic Area and households located in Switzerland.
It is true that the provision is not directly based on the taxpayer’s nationality or place of residence. In the EuGH’s view, however, in the case of cross-border workers the criterion of the household’s location may in practice have the same effect as a distinction based on place of residence.
A cross-border worker who lives in Switzerland and works in Germany does not necessarily have accommodation at their place of employment that may be classified as their own household. If the tax reduction required a household in Germany, such an employee would generally be unable to obtain the advantage. The provision may therefore give rise to indirect discrimination on grounds of nationality, which is prohibited by Article 9(2) of Annex I.
Situations Are Not Incomparable
Article 21(2) of the Agreement on the Free Movement of Persons permits tax distinctions between persons whose situations are not comparable, in particular with regard to their place of residence. In the field of direct taxation, residents and non-residents are generally often in different situations. This applies in particular to the source of their income, their personal ability to pay and the consideration of their personal and family circumstances.
However, those considerations did not justify the difference in treatment in the specific case. The husband was fully liable to income tax in Germany. With regard to the taxation of his income, he was therefore not in an objectively different situation from a resident.
Moreover, the relief under § 35a EStG is not based on the taxpayer’s personal ability to pay or their personal and family circumstances. It is calculated as a fixed percentage of the eligible expenses and is subject to statutory maximum amounts.
Grounds of Justification Are Unsuccessful
Combating Undeclared Work
According to the case-law, combating undeclared work may, in principle, constitute an overriding reason in the public interest. However, a provision based on that objective must be suitable for achieving the intended aim and must not go beyond what is necessary for that purpose.
The tax reduction under § 35a EStG may create an incentive to use properly invoiced services instead of undeclared work. The invoice requirement and payment into the service provider’s account are intended to ensure that only properly documented services qualify for the relief.
In the EuGH’s view, however, the exclusion of households in Switzerland was not suitable for ensuring the achievement of that objective. There was no indication that efforts to combat undeclared work would be undermined if the tax reduction were also granted for services performed in Swiss households. Moreover, the Agreement on the Free Movement of Persons permits service providers from one contracting party to provide services in the territory of the other contracting party within the limit laid down in the Agreement of 90 actual working days per calendar year.
No Justification Based on Fiscal Coherence
Nor could the need to preserve the coherence of the tax system justify the unequal treatment. This ground of justification requires a direct link between the tax advantage granted and the offsetting of that advantage by a specific tax charge.
The Belgian government had argued that the tax reduction, calculated on the basis of a proportion of the costs of services and tradespeople’s work, was offset by the taxation of those costs. The EuGH, however, held that this did not sufficiently establish the requisite direct link.
The EuGH’s Decision on Swiss Households
The EuGH ruled that Articles 1, 2, 7 and 15 of the Agreement on the Free Movement of Persons, read in conjunction with Article 9(2) of Annex I thereto, preclude a Member State provision such as § 35a(4) EStG. Accordingly, an income tax reduction for household-related services and tradespeople’s services may not be denied solely because the services were performed in the Swiss household of an employed cross-border worker.
The judgment therefore specifically concerns the treatment of an employed cross-border worker residing in Switzerland. The decision on costs in the main proceedings, which remain pending before the Finanzgericht Köln, is a matter for that court.
The decision highlights the importance of the principle of equal treatment under the Agreement on the Free Movement of Persons, including in relation to tax advantages. In cross-border cases, the decisive issues may include classification as a cross-border worker, the scope of § 35a EStG and the relationship between German tax law and the Agreement on the Free Movement of Persons. MTR Legal advises companies, investors and private individuals on corresponding matters as part of its tax law advisory services.
