On 13 October 2022, the Court of Justice of the European Union (CJEU) issued its judgment in a case concerning the German surcharge for failing to provide sufficient fiscal documentation and the EU freedom of establishment. The case concerned a limited partnership (X) established in Germany that holds and manages shareholdings and provides advisory and managerial assistance services. X’s general partner is a company established in Germany and its limited partner is a company established in the Netherlands, whose sole shareholder, Y, is also a company established in the Netherlands. Y provided services on the basis of a business management contract concluded, for 2007, with X’s general partner and then, for the following years of the period at issue, with X.

X was the subject of a tax audit for the tax years 2007 to 2010 relating, in particular, to the management fees paid to Y. The documentation that X was invited to provide was held to be insufficient by the German tax authorities. It was subsequently agreed that part of X’s payments to Y during the period at issue, amounting to EUR 400,000 per year and for a total amount of EUR 1.6 million, had been incorrectly entered in the accounts as operating expenses. Consequently, X was ordered to pay a tax surcharge, corresponding to 5% of X’s additional income, estimated at EUR 20,000 per year, making a total amount of EUR 80,000. X lodged a complaint against the decision, which was rejected, and then brought an action against the decision before the Finance Court, Bremen, claiming that the tax surcharge imposed infringed the freedom of establishment.

The Finance Court considered that the obligation to provide fiscal documentation constitutes a restriction on the freedom of establishment but may be regarded as justified by overriding reasons in the public interest, as established by the Federal Finance Court. However, it has not been established whether the surcharge that may be imposed for insufficient documentation is also justified. As such, the question regarding the surcharge was referred to the CJEU for a preliminary ruling.

In its judgment, the CJEU confirmed that both the documentation requirements and the surcharge do not infringe upon the freedom of establishment. The final conclusion is as follows:

Article 49 TFEU must be interpreted as meaning that it does not preclude national legislation under which, in the first place, the taxpayer is subject to an obligation to provide documentation on the nature and content of, as well as on the economic and legal bases for, prices and other terms and conditions of his, her or its cross-border business transactions, with parties with which he, she or it has a relationship of interdependence, in capital or other aspects, enabling that taxpayer or those parties to exercise a definite influence over the other, and which provides, in the second place, in the event of infringement of that obligation, not only that his, her or its taxable income in the Member State concerned is rebuttably presumed to be higher than that which has been declared, and the tax authorities may carry out an estimate to the detriment of the taxpayer, but also that a surcharge of an amount equivalent to at least 5% and at most 10% of the excess income determined is imposed, with a minimum amount of EUR 5,000, unless non-compliance with that obligation is excusable or if the fault involved is minor.