A 27 February 2020 decision of the Court of Justice of the European Union (CJEU) was published on whether the Czech Republic's denial of the deduction of prior losses incurred in another Member State following a change in place of effective management and tax residence violates the freedom of establishment.
The case involved AURES Holdings, a company incorporated under Netherlands law whose registered seat and place of effective management were in the Netherlands, by virtue of which it was a tax resident of the Netherlands. In the 2007 tax year, AURES incurred a loss of EUR 2,792,87 in the Netherlands, which was determined by the Netherlands tax authorities in accordance with the tax legislation of that Member State.
On 1 January 2008, AURES set up a branch in the Czech Republic and on 1 January 2009, AURES transferred its place of effective management from the Netherlands to that branch's address. Following that transfer, AURES also transferred its tax residence from the Netherlands to the Czech Republic with effect from the same date. However, AURES retained its registered seat and its entry in the commercial register in Amsterdam (Netherlands) and continues to be governed, as regards its internal relations, by Netherlands law.
In light of the transfer of place of effective management and, consequently, of its tax residency, AURES applied to the Czech tax authorities for deduction of the loss which it had incurred in the Netherlands on the basis of the 2007 tax year from the corporation tax base for which it was liable on the basis of the 2012 tax year.
Following an investigatory review, the Czech tax authorities considered that the loss could not be invoked as a deductible element of the tax base on the basis of Paragraph 38n of the Law on income tax. According to the authorities, AURES is, as a Czech tax resident, taxable on its worldwide income under Czech tax law. However, it can deduct from the tax base only a loss arising from an economic activity in the Czech Republic determined in accordance with the Law on income tax, since that law does not govern the deduction of a tax loss in the event of a change in tax residency and does not provide for the transfer of such a loss from any Member State other than the Czech Republic. Accordingly, in a tax notice of 11 September 2014, the Czech tax authorities assessed the corporation tax payable by AURES for the 2012 tax year without deducting from that corporation tax base the loss incurred in the 2007 tax year.
AURES lodged an objection against that tax notice, which was rejected by the Appellate Tax Directorate, and then brought an action before the City Court, Prague, which was dismissed.
The Czech tax authorities, the Appellate Tax Directorate, and the City Court considered, first, that neither the Law on income tax nor the 1974 tax treaty between the Czechoslovak Socialist Republic and the Netherlands, in the version in force on 31 May 2013, provided for the cross-border transfer of a tax loss upon the transfer of a company's place of effective management, save in specific circumstances which are not relevant in the present case. The general rules in Paragraphs 34 and 38n of that law do not allow for the deduction of a loss that has not been determined in accordance with Czech law.
Second, those authorities and that court took the view that, contrary to the arguments put forward by AURES, the impossibility of deducting the loss in question was not contrary to freedom of establishment.
In their view, the past judgments relied on by AURES, concerned situations which are objectively different from that at issue in the main proceedings. Citing the judgment of 15 May 2008, Lidl Belgium (C 414/06, EU:C:2008:278), the Appellate Tax Directorate took the view that, in the case in the main proceedings, there was a genuine danger that tax loss incurred on the basis of the 2007 tax year would be taken into account twice.
AURES brought an appeal on a point of law before the Supreme Administrative Court, in respect of the judgment of the City Court. AURES claimed in the appeal before that court that by the cross-border transfer of its place of effective management it exercised the freedom of establishment and that the impossibility for it to deduct the 2007 tax loss in the Czech Republic, which it can no longer claim in the Netherlands, amounts to an unjustified restriction on that freedom.
The Supreme Administrative Court notes that the Law on income tax does not allow a company which, like AURES, has transferred its place of effective management to the Czech Republic from another Member State to claim a tax loss suffered in that Member State. The transfer of a tax loss is possible only in the context of cross-border transactions specifically covered by that law, which are not relevant to the case in the main proceedings.
In order to dispose of the case in the main proceedings, the Supreme Administrative Court, therefore, considers that it is necessary to address the arguments relating to freedom of establishment. In that regard, it is necessary to determine in the first place whether that freedom is applicable to the case of a cross-border transfer of a company's place of effective management.
If so, it is necessary to examine, in the second place, whether national legislation which does not allow a company to claim, in the host Member State, a loss incurred in the Member State of origin before the transfer of its place of effective management to the host Member State, is compatible with that freedom. While noting that the field of direct taxation is not, in principle, subject to harmonisation and that the Member States are sovereign in the matter, the referring court asks whether that freedom means that the transfer of tax residency from one Member State to another Member State must always be neutral from a tax point of view.
The Supreme Administrative Court, therefore, decided to stay the proceedings and to refer the following questions to the CJEU for a preliminary ruling:
- Can the concept of freedom of establishment within the meaning of Article 49 (TFEU) be held (prima facie) to cover a simple transfer of the place of a company's management from one Member State to another Member State?
- If so, is it contrary to Articles 49, 52 and 54 (TFEU) for national law not to allow an entity from another Member State, when relocating its place of business or place of management to the Czech Republic, to claim a tax loss incurred in that other Member State?
With regard to the first question, the CJEU found that Article 49 TFEU must be interpreted as meaning that a company incorporated under the law of a Member State, which transfers its place of effective management to another Member State without that transfer affecting its status as a company incorporated under the law of the first Member State, may rely on that article for the purposes of contesting a refusal in the second Member State to defer losses prior to that transfer.
However, with regard to the second question, the CJEU found that Article 49 TFEU must be interpreted as not precluding legislation of a Member State which excludes the possibility for a company, which has transferred its place of effective management and, as a result, its tax residency to that Member State, from claiming a tax loss incurred, prior to that transfer, in another Member State, in which it has retained its registered seat.
Based on these findings, the Czech tax authorities' denial of the deduction for the prior loss is not contrary to the freedom of establishment.