By Davide Anghileri, University of Lausanne
The European Court of Justice (ECJ) has ruled invalid a Danish law that precludes the possibility of deducting losses incurred by a Danish permanent establishment (PE) of a Danish company’s non-resident subsidiary from the group’s overall profits where it is not possible to set off those losses against that subsidiary’s profits in the Member State of the subsidiary.
The case, NN A/S v Skatteministeriet (C-28/17), decided July 4, relates a Danish parent company with two Swedish subsidiaries each in turn with a PE in Denmark. The two PEs merged into one and therefore only one subsidiary became owner of the two PEs.
In Sweden, the transaction was treated as tax neutral and accordingly, the transfer of the goodwill from one PE to the other one could not be immediately written off. In Denmark, the merger was taxed as a transfer of assets at market value, which allowed one PE to write off the acquisition cost of the goodwill built up by the other one and, consequently, to show a negative result for the corresponding tax year.
However, the Danish tax authority refused, for that tax year, the setting-off of the PE’s losses against the overall group taxation income, for which the parent group had applied. In the opinion of the Danish tax authority, the law on corporation tax precluded this since those losses could be set off against the taxable income in Sweden of the Swedish company which owned the branch.
The refusal was appealed and then remitted to the ECJ for a preliminary ruling. The ECJ ruled in favour of the taxpayer, concluding that the losses were deductible.
The ECJ pointed out that the Danish legislation treats differently a Danish group which owns a permanent establishment in Denmark through a non-resident subsidiary and a group in which all of the companies have their registered offices in Denmark.
Then, as per the Bevola case (C-650/16), the ECJ affirmed that non-resident subsidiaries with domestic PEs and resident subsidiaries with domestic PEs are in comparable situations when there is no other possibility of deducting the losses of the non-resident subsidiary attributable to the PE which is resident in the Member State in which the subsidiary is established.
In fact, considering the objective pursued by the national legislation (i.e., to prevent the double deduction of losses), the group whose subsidiary is situated in another Member State is not in a different situation to that of the purely national group, in the light of the objective of preventing the double deduction of its losses. Hence, the tax-paying capacity of the two groups is then affected in the same way by the losses of their resident permanent establishment, the court said.
The ECJ also concluded that the Danish legislation does not respect the principle of proportionality as it denies the Danish group of any effective possibility of deducting the losses of the resident permanent establishment of its non-resident subsidiary.
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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