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European Commission v Federal Republic of Germany

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In European Commission v Federal Republic of Germany (C-591/13) (16 April 2015), the CJEU found that German provisions which only allow the deferral of capital gains tax in circumstances where the sale proceeds are reinvested in assets located in Germany are contrary to the principle of freedom of establishment.

Under German tax law, tax payable on the disposal of certain capital assets used in permanent establishments located in Germany can be deferred until the sale of the replacement assets; this is on the condition that the replacement assets form part of the assets of a permanent establishment also situated in Germany. Such deferral is therefore not possible if the assets belong to a permanent establishment situated outside Germany but within the European Union.

The European Commission sought a declaration from the CJEU that these provisions were in breach of TFEU (Freedom of establishment) art 49. It argued that an economic operator will take account of the fact that reinvestment outside Germany is less advantageous than reinvestment in Germany.

Agreeing with the Commission, the CJEU found that the provisions hindered the freedom of establishment and went further than necessary. Allowing the deferral of tax in circumstances where the replacement assets are situated outside Germany would not force Germany to abandon its right to tax capital gains generated within the ambit of its powers of taxation. Taxable persons wishing to reinvest outside Germany should therefore be given the choice between immediate payment and bearing the administrative burden of deferral.

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Why it matters: The discrimination was established, but the German authorities argued that it was justified to preserve their taxing powers and achieve their policy objectives. The CJEU robustly disagreed. The administrative difficulties, linked with the necessity of taxing assets situated outside Germany, did not justify this hindrance to the freedom of establishment. The policy objective of encouraging reinvestment could be achieved with cross- border investment.




Issue: 1259
Categories: Cases