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Advocate General Finds that Germany May Disallow Deduction of Final Losses of Non-Resident PE Where Such PE is Exempt Under a Tax Treaty — Orbitax Tax News & Alerts

On 10 March 2022, an opinion was issued from Advocate General (AG) Collins of the Court of Justice of the EU (CJEU) for a preliminary ruling on whether the German tax authority's refusal to take into account 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 profit/losses of the establishment were exempt in Germany under a tax treaty. The case and opinion are summarized as follows

Introduction

By the present request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany), the Court of Justice is asked, in substance, to determine whether a resident parent company has the right, on the basis of Article 43 EC read in conjunction with Article 48 EC, 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.

The request has been made in the context of a dispute between a company established in Germany, W, and the German tax authorities concerning the latters' 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 convention for the avoidance of double taxation 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 is 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 bilateral convention for the avoidance of double taxation between the two Member States?

The referring court also asks four additional questions if the first question is answered in the affirmative. These questions are addressed, but considering the AG's answer to the first question, there is no need to formally answer the other four.

AG Conclusion

In the opinion, AG Collins concludes that the CJEU should answer the first question referred for a preliminary ruling as follows:

Article 43, in conjunction with Article 48, of the Treaty establishing the European Community (now Article 49, in conjunction with Article 54, of the Treaty on the Functioning of the European Union) does not preclude 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), where the legislation in question exempts profits and losses by reference to a bilateral convention for the avoidance of double taxation between the two Member States.