By Davide Anghileri, University of Lausanne
A Danish law that precludes the deductibility of final losses incurred by a foreign permanent establishment (PE) violates EU law because it is incompatible with freedom of establishment, the Court of Justice of the European Union (CJEU) ruled June 12.
The decision in Bevola (C-650/16), follows the opinion of the EU Advocate General, who came to the same conclusion.
Bevola, a company resident in Denmark, closed its PE in Finland in 2009 and thus relief could not be claimed in Finland for its losses. Thereafter, Bevola applied to deduct those losses from its Denmark corporate taxable income, relying on the ECJ’s 2005 Marks & Spencer case (C‑446/03).
In Marks & Spencer, the CJEU concluded that a parent company may deduct losses incurred by a non-resident subsidiary which has exhausted the possibilities of deduction in its state of residence. The court ruled that the losses must be definitive to be deducted by the parent company.
Bevola opted for Denmark’s “national joint taxation” scheme, according to which corporation tax for the whole group (which takes into account profits of resident companies, PEs, and the real property of Danish companies situated in Denmark) is assessed as part of a group relief scheme.
Denmark also offered an “international joint taxation” scheme, which would apply to the profits of both Danish and foreign group companies, in addition to all their PEs abroad, for a minimum period of 10 years.
The Danish legislation was inspired by the need to prevent tax avoidance by means of artificial arrangements so to prevent a parent company from “cherry picking” which non-resident entities’ income is included in the group tax relief scheme as this would inevitably lead to the selection of those making a loss and the exclusion of those making a profit. Otherwise, the symmetry between the right to tax profits and the right to deduct losses would be seriously compromised.
The Danish Tax Administration denied the deduction as Bevola did not opt for the international joint taxation scheme provided by its law on corporate taxation.
Bevola appealed the decision in Danish court, arguing that a deduction would have been permissible if the losses had been incurred by a Danish PE and that that difference in treatment constituted a restriction of the freedom of establishment guaranteed by Article 49 TFEU.
The Danish court referred the case to the CJEU asking whether, in circumstances equivalent to those in the CJEU decision in the Marks & Spencer case, the Danish law on cross-border loss relief is compatible with the freedom of establishment.
The decision
The CJEU started from the principle that, according to prior case law, the comparability of a cross-border situation with an internal situation must be examined with regard to the aim pursued by the law at issue. As stated, the Danish legislation is designed to prevent double taxation of profits and, symmetrically, double deduction of losses of Danish companies possessing PEs abroad.
Hence, the situation of those companies that must be compared with the situation of Danish companies having permanent establishments in Denmark. The court affirmed that, usually, companies which have a PE in another Member State are not in a comparable situation to that of companies possessing a resident permanent establishment.
Nevertheless, the CJEU stated that the situation of a resident company possessing a PE abroad is not different from that of a resident company possessing a resident PE in the case of losses attributable to the non-resident PE which has ceased activity and whose losses could not, and no longer can, be deducted from taxable profits in the Member State in which it carried on its activity.
In fact, the objective of preventing double deduction of losses is not in discussion in a case like this, the court pointed out
The CJEU also said that a company’s ability to pay taxes is affected the same way if it possesses a non-resident PE that has definitively incurred losses as if it had a resident PE that incurred losses. Therefore, the two situations are objectively comparable in this respect, too.
However, the court explained that the legislation at issue could be justified by overriding reasons in the public interest relating to the balanced allocation of powers of taxation between the Member States, the coherence of the Danish tax system, and the need to prevent the risk of double deduction of losses.
Nevertheless, the CJEU stated that the Danish legislation goes beyond what is necessary for pursuing the objectives protected by the law.
Therefore, contrary to position taken by the Danish tax administration, a Danish company possessing a PE in another Member State should be allowed to deduct from its taxable results the losses attributable to that PE if the losses are definitive.
Hence, making reference to the case Marks & Spencer the CJEU concluded saying that the taxpayer should prove in front of its national court that losses are definitive.
This means that the non-resident PE must exhaust all possibility of deducting losses available under the law of the Member State in which the establishment is situated and, second, the non-resident PE has ceased to receive any income (even a minimal income) from that establishment, so that there is no longer any possibility of the losses being taken into account in that Member State.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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