On 22 September 2022, the Court of Justice of the European Union (CJEU) issued its judgment on whether the German tax authority's refusal to take into account the final losses of a taxpayer's permanent establishment in another EU Member State violated the freedom of establishment. The tax authority refused to take into account the final losses because the profits of the establishment were exempt in Germany under a tax treaty. The case is summarized as follows as previously reported on the Advocate General (AG) opinion in the case, which is in line with the final CJEU judgment.
The CJEU was asked, in substance, to determine whether a resident parent company has the right to deduct from its taxable income losses incurred by its non-resident permanent establishment, which has ceased activity as a result of which those losses can no longer be taken into account in the State where that non-resident permanent establishment is located, in circumstances where the profits and losses of that non-resident establishment are exempt from tax in the State of residence of the parent company under a convention for the avoidance of double taxation (tax treaty).
The request was made in the context of a dispute between a company established in Germany, W, and the German tax authorities concerning the latter's refusal to take account, for the purpose of determining the amount of the former's liability to corporation tax and the basis of its assessment to trade tax for the 2007 tax year, of the final losses incurred by its branch situated in the United Kingdom. In particular, the issue arises as to whether the approach taken by the Court in the judgment in Bevola and Jens W. Trock in relation to the issue of the objective comparability of the respective situations of residents and non-residents with regard to the deductibility of final losses can be transposed to the present case, where the exemption of the profits – and symmetrically of the losses – of the non-resident permanent establishment is derived from a bilateral tax treaty and not, as in the case that gave rise to the abovementioned judgment, from a unilateral provision of national law.
Referring court queries
The first (primary) question of the referring court was whether Article 43, in conjunction with Article 48, of the Treaty establishing the European Community (now Article 49, in conjunction with Article 54 EU]) is to be interpreted as precluding legislation of a Member State which prevents a resident company from deducting losses incurred by a permanent establishment in another Member State from its taxable profits where, first, the company has exhausted the possibilities to deduct those losses available under the law of the Member State in which the permanent establishment is situated and, second, it has ceased to receive any income from that establishment, so that there is no longer any possibility of account being taken of the losses in that Member State ("final" losses), if the legislation in question concerns an exemption for profits and losses under a tax treaty between the two Member States?
The referring court also asked four additional questions if the first question is answered in the affirmative. Because the first question is not answered in the affirmative (see below), the other questions are not answered.
In the judgment, the CJEU found that it is apparent from the request for a preliminary ruling that, under the tax treaty, Germany waived its power to tax profits made by permanent establishments situated in the United Kingdom through which their resident companies carry on industrial or commercial activities. The same applies, symmetrically, to the taking into account of losses recorded by those establishments. Since, under a tax treaty, Germany has waived its power to tax the profits made and losses incurred by such a permanent establishment situated in another Member State, a resident company that has such an establishment is not in a situation comparable to that of a resident company that has a permanent establishment situated in Germany in the light of the objective of preventing or mitigating the double taxation of profits and, symmetrically, the double taking into account of losses. Consequently, in a situation such as that at issue in the main proceedings, no restriction on the freedom of establishment guaranteed by Articles 49 and 54 TFEU can be established.
The final conclusion of the CJEU is as follows:
Articles 49 and 54 TFEU must be interpreted as not precluding a tax system of a Member State under which a company resident in that Member State may not deduct from its taxable profits the final losses incurred by its permanent establishment situated in another Member State where the Member State of residence has waived its power to tax the profits of that permanent establishment under a double taxation convention.