By Davide Anghileri
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 the freedom of establishment, the Advocate General of the Court of Justice of the European Union (CJEU) concluded in his 17 January opinion in case C-650/16 (Bevola case).
Bevola, a company registered in Denmark, closed its PE in Finland in 2009 and relief could not be claimed in Finland for its losses. Thereafter, Bevola applied to deduct those losses from its taxable income for the purposes of corporation tax in Denmark, relying on the Marks & Spencer case.
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. Hence, the losses should be definitive in order 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 is 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’ profit 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 the 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 CJE,U 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 opinion
The Advocate General, pointed out that the Marks & Spencer case law should be regarded as the appropriate starting point for the Court’s decision, agreeing with the Danish court that the facts of the two cases are similar in nature.
However, the Advocate General specified that if the losses of the PE in Finland cannot be classified as definitive the reference for a preliminary ruling will be merely hypothetical and, therefore, inadmissible.
Nevertheless, there are two unresolved issues in the case at stake, the Advocate General noted.
First, the losses in the instant case are derived from a non-resident PE and not from a subsidiary, like in Marks & Spencer, and second, the Danish tax system does not absolutely preclude the deduction of those losses, permitting a deduction if a resident company opts for the international joint taxation scheme.
The Advocate General noted that the law gives Denmark the power to tax the revenue of all non-resident subsidiaries and all non-resident PEs, where both belong to parent companies resident in Denmark. Hence, the international joint taxation scheme places on an equal footing resident PEs and non-resident PEs. Consequently, he concluded that the definitive losses of a non-resident PE in Denmark, incurred in the year in which that PE closed and which cannot be recovered in Finland, may be equated with the losses of a resident PE in Denmark, when the company owning both PEs is resident in Denmark.
Considering that a restriction of the freedom of establishment could arise in case of final losses of a non-resident PE, the Advocate General focused its analysis on the proportionality of the Danish legislation that enables the deduction of non-resident entities only in case a group choses the international joint taxation scheme.
Therefore, on the second issue, the Advocate General affirmed that the international joint taxation scheme is too onerous and unrealistic for Danish groups that work globally. Moreover, he added that the compulsory minimum period of 10 years is disproportionate and constitutes a significant unjustified obstacle to the exercise of the option.
Hence the Advocate General concluded that, in accordance with the Marks & Spencer decision, the Danish legislation is not compatible with the freedom of establishment, as it prevents a Danish company from deducting final losses incurred by a non-resident PE and that the optional international joint taxation scheme is not sufficient to remove the existence of a restriction on the freedom of establishment, as that regime is disproportionately onerous.
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].
Latest posts by Davide Anghileri (see all)
- Swiss government approves new law governing tax treaties - November 11, 2020
- EU states’ compliance with tax avoidance directives assessed in Commission report - August 26, 2020
- Italy clarifies VAT reporting obligations of online marketplaces - June 16, 2020
- EU blacklist: Cayman Islands added with other three jurisdictions - February 18, 2020
- Italy adopts digital services tax, notional interest deduction - January 8, 2020
Be the first to comment