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CJEU Holds Danish Non-Resident Establishment Loss Restriction Violates Freedom of Establishment if Losses are Definitive

On 12 June 2018, a judgment of the Court of Justice of the European Union (CJEU) was issued concerning whether Denmark's loss restriction rules in relation to non-resident establishments violate the EU freedom of establishment principle. The case involved a Danish auto parts company, Bevola, which had maintained an establishment in Finland. After the establishment was closed in 2009, Bevola attempted to claim a deduction of the net losses of the establishment that could not be claimed in Finland. The Danish tax authority denied the claim, taking the position that such losses could only be claimed if Bevola had opted for international joint taxation, which it had not. This was appealed to a lower court, which sided with the tax authority, before being referred to the CJEU by the Danish Eastern High Court.

In its judgment, the CJEU found in favor of Bevola. Citing prior case law, the CJEU found that the restriction on the deduction of losses violates the freedom of establishment when the losses attributable to a non-resident establishment are definitive. The final ruling of the CJEU is as follows:

Article 49 TFEU must be interpreted as precluding legislation of a Member State under which it is not possible for a resident company which has not opted for an international joint taxation scheme, such as that at issue in the main proceedings, to deduct from its taxable profits losses incurred by a permanent establishment in another Member State, where, first, that company has exhausted the possibilities of deducting those losses available under the law of the Member State in which the establishment is situated and, second, it has ceased to receive any income from that establishment, so that there is no longer any possibility of the losses being taken into account in that Member State, which is for the national court to ascertain.

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