In A/SBevola and Jens W. Trock ApS v Skatteministeriet (Case C-650/16) (12 June 2018), the CJEU found that the reasoning of its Marks & Spencer decision (Case C-446/03) applies to the losses of a foreign permanent establishment.
Bevola was incorporated in Denmark and produced ranges of products for wagons and trailers. It was a member of a group whose ultimate parent, Jens W. Trock, was also a Danish company.
Bevola’s Finnish establishment had closed in 2009 with losses, which it contended could not be deducted in Finland. It had therefore applied to set off these losses against its taxable profits in Denmark but its application had been turned down by the Danish tax authorities on the ground that Danish law did not allow the set off of losses realised by a permanent establishment situated outside Denmark.
The issue was whether Danish law was in breach of TFEU art 49 (freedom of establishment), since losses realised by a permanent establishment in Denmark could have been set off against taxable profits realised in Denmark.
The CJEU observed that the relevant Danish provision meant that a resident company with a permanent establishment in another member state is in a less favourable position than it would be if the permanent establishment was in Denmark. As established in Lidl (Case C-414/06), this difference in treatment could discourage a Danish company from carrying on its business through a permanent establishment situated in another member state.
The difference in treatment would not, however, constitute a restriction of the freedom of establishment if it did not apply to objectively comparable situations. In this respect, the court observed that the profits of a foreign permanent establishment of a Danish company are not taxable in Denmark. This may constitute an advantage in certain circumstances; however, in a situation such as Bevola’s, it is a disadvantage. The court also noted that the ultimate parent company of a Danish group can opt for international joint taxation and decide that all the companies in the group, resident or non-resident, including their permanent establishments and real property, inside or outside Denmark, are to be taxable in Denmark. However, as this option is subject to strict conditions, the court considered that the difference in treatment concerned situations which were objectively comparable.
The court accepted that the measure at issue may be justified to safeguard the balanced allocation of taxing powers, and more particularly, the necessity to avoid double deductions of taxes. However, it noted that, in circumstances where a set-off of losses is no longer possible in the country of the permanent establishment, the risk of double deduction no longer exists.
The CJEU concluded that the reasoning of Marks & Spencer in relation to the losses of foreign subsidiaries could apply equally to the losses of permanent establishments in circumstances where it is established that the losses are ‘definitive’; i.e. cannot be relieved in future accounting periods.
Why it matters: In this ground breaking decision, the CJEU has now confirmed that definitive losses of a permanent establishment in one member state can be set-off against profits of the company it belongs to, even if that company is incorporated in a different member state. On the basis of this decision, several provisions of CTA 2010 may need to be amended.
In A/SBevola and Jens W. Trock ApS v Skatteministeriet (Case C-650/16) (12 June 2018), the CJEU found that the reasoning of its Marks & Spencer decision (Case C-446/03) applies to the losses of a foreign permanent establishment.
Bevola was incorporated in Denmark and produced ranges of products for wagons and trailers. It was a member of a group whose ultimate parent, Jens W. Trock, was also a Danish company.
Bevola’s Finnish establishment had closed in 2009 with losses, which it contended could not be deducted in Finland. It had therefore applied to set off these losses against its taxable profits in Denmark but its application had been turned down by the Danish tax authorities on the ground that Danish law did not allow the set off of losses realised by a permanent establishment situated outside Denmark.
The issue was whether Danish law was in breach of TFEU art 49 (freedom of establishment), since losses realised by a permanent establishment in Denmark could have been set off against taxable profits realised in Denmark.
The CJEU observed that the relevant Danish provision meant that a resident company with a permanent establishment in another member state is in a less favourable position than it would be if the permanent establishment was in Denmark. As established in Lidl (Case C-414/06), this difference in treatment could discourage a Danish company from carrying on its business through a permanent establishment situated in another member state.
The difference in treatment would not, however, constitute a restriction of the freedom of establishment if it did not apply to objectively comparable situations. In this respect, the court observed that the profits of a foreign permanent establishment of a Danish company are not taxable in Denmark. This may constitute an advantage in certain circumstances; however, in a situation such as Bevola’s, it is a disadvantage. The court also noted that the ultimate parent company of a Danish group can opt for international joint taxation and decide that all the companies in the group, resident or non-resident, including their permanent establishments and real property, inside or outside Denmark, are to be taxable in Denmark. However, as this option is subject to strict conditions, the court considered that the difference in treatment concerned situations which were objectively comparable.
The court accepted that the measure at issue may be justified to safeguard the balanced allocation of taxing powers, and more particularly, the necessity to avoid double deductions of taxes. However, it noted that, in circumstances where a set-off of losses is no longer possible in the country of the permanent establishment, the risk of double deduction no longer exists.
The CJEU concluded that the reasoning of Marks & Spencer in relation to the losses of foreign subsidiaries could apply equally to the losses of permanent establishments in circumstances where it is established that the losses are ‘definitive’; i.e. cannot be relieved in future accounting periods.
Why it matters: In this ground breaking decision, the CJEU has now confirmed that definitive losses of a permanent establishment in one member state can be set-off against profits of the company it belongs to, even if that company is incorporated in a different member state. On the basis of this decision, several provisions of CTA 2010 may need to be amended.
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