ECJ Grand Chamber Judgment on Cross-Border Loss Relief for Permanent Establishements

On June 12^th 2018, the Grand Chamber of the European Court of Justice (“ECJ”) handed down its judgment in Case C-650/16 A/S Bevola. The case concerned the compatibility of Danish rules on the deductibility of foreign permanent establishment (“PE”) losses with the freedom of establishment provided by Article 49 of the Treaty of the Functioning of the European Union.

Under Danish tax law, A/S Bevola, a Danish resident company, could not deduct the losses suffered by its foreign PE located in Finland unless it had opted for the international joint taxation scheme under Danish law which was subject to strict conditions. In the case of a domestic PE (branch), losses incurred in Denmark are deductible regardless of participation in the joint taxation scheme. First, the ECJ held that this difference in treatment between a foreign PE and a domestic PE (i.e. a branch) could discourage a resident company from carrying on its business through a PE situated in another Member State. Such a difference in treatment may amount to a restriction if the two situations are comparable. In this regard, the ECJ held that the objective of the measure is to prevent double taxation of profits and double deduction of losses of Danish companies possessing foreign permanent establishments. In the case of final losses that cannot be deducted from taxable profits in the Member State of the PE, foreign and domestic PEs are comparable with regard to the objective of preventing the double deduction of losses.

The measure, according to the ECJ, could however be justified by overriding reasons of public interest relating to the balanced allocation of powers between Member States, the coherence of the Danish tax system, and the need to prevent the risk of double deduction of losses. When considering the proportionality of the measure in light of these objectives, the ECJ followed the same reasoning as in Case C-446/03 Marks & Spencer. The measure is justified because allowing the resident company to opt in and out of the joint taxation scheme from one year to the next would amount to allowing it to choose freely the Member State in which it could book its foreign PE losses. However, in the case of definitive losses, the risk of double deduction of losses no longer exists and therefore the measure at issue goes beyond what is necessary to achieve its objective.