The European Court of Justice on April 16 ruled, in European Commission v. Federal Republic of Germany, C‑591/13, that Germany violated freedom of establishment principles through its tax scheme which allows deferral of taxation of the capital gains realized on the sale of a capital asset forming part of the assets of a permanent establishment of the taxable person located within German territory subject to the condition that the capital gains are reinvested in the acquisition of replacement assets forming part of the assets of a permanent establishment of the taxable person located within that territory.
Under the German tax scheme, if the same replacement assets formed part of the assets of a permanent establishment located outside that territory, the capital gains resulting from the sale of the replaced asset would be subject to immediate taxation.
The court also found that the restriction was not objectively justified by overriding public-interest grounds recognized by EU law. The court thus concluded that by adopting and maintaining in force the tax scheme, Germany failed to fulfill its obligations under Article 49 TFEU and Article 31 of the Agreement on the European Economic Area of 2 May 1992.
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