Background
On 22 September 2022, the Court of Justice of the European Union ("ECJ") rendered its judgment in case C-538/20 (i.e., Finanzamt B and W AG) finding that Germany does not infringe the freedom of establishment in not allowing the tax-deduction of final losses which a German company had incurred in its permanent establishment ("PE") situated in the United Kingdom, because Germany has waived, as State of residence, its power to tax the profits (and/or deduct losses) of that PE by virtue of the UK-Germany double tax treaty ("UK-Germany DTT").
Fact pattern
The complainant was a German bank, which owned a loss-making PE situated in the UK. The complainant claimed the tax deduction of the final losses, incurred by its foreign PE, in its German tax returns filed for the fiscal year during which its PE was closed in the UK. The German tax authorities disregarded the final losses of the UK PE for the complainant’s corporate tax and trade tax. The complainant made the case before the German Federal Fiscal Court (i.e., Bundesfinanzhof) that the German tax authorities’ construction of the UK-Germany DTT, according to which an exemption of profits from a UK PE means that losses are also excluded, violates the freedom of establishment.
As being unsure whether the losses incurred by a foreign PE located in the UK should not be taken into account for the calculation of the tax payable by the complainant in Germany in the light of the principle of the freedom of establishment, The Federal Fiscal Court referred the case to the ECJ.
ECJ judgment
In order to issue the present ruling, the ECJ made in particular reference to its judgment C-650/16 rendered on 12 June 2018 (i.e., A/S Bevola and Jens W. Trock ApS v. Skatteministeriet). As a reminder, under that ruling the ECJ enacted the principle of the tax allocation of a PE's final losses to its head office/parent company located in another EU Member State.
However, in its present judgement, the ECJ considers that its decision rendered in the C-650/16 ruling does not provide a clear answer in the particular case where the tax exemption of foreign profits incurred by a PE is provided for by a double tax treaty (rather than by national laws as t was the case under C-650/16). In this latest judgmeent, the ECJ further confirmed in what circumstances losses incurred by a foreign PE characterized by virtue of international tax rules must be regarded as ‘final’, within the meaning of that case-law, and how the amount of those losses is to be determined. On this particular point, the ECJ ruled, under the scenario where the contracting state of residence refrained from exercising its power to tax the profits (and losses) of the foreign PE under a double tax treaty, the situation of a resident company with a PE located in another Member State that is not objectively comparable to the situation of a resident company located in a Member State with a domestic PE (and on which a taxation right is waived by virtue of a domestic law). Therefore, the freedom of establishment is not infringed by the unequal treatment of the two situations and there is no requirement under EU law to deduct final losses of the foreign PE at the level of an EU head office/parent company.
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