Germany: Disallowance of final losses incurred by UK permanent establishment held valid (CJEU Advocate General opinion)

The German Federal Tax Court (BFH) had requested clarification because of the CJEU’s prior arguably conflicting decisions on the issue.

Incurred by UK permanent establishment held valid (CJEU AG opinion)

The Court of Justice of the European Union (CJEU) Advocate General in March 2022 issued an opinion in the W case (C-538/20) that Germany’s disallowance for German tax purposes, of final losses incurred by a UK permanent establishment of a German taxpayer, was not incompatible with the European freedom of establishment. For background, read TaxNewsFlash.

The German Federal Tax Court (BFH) had requested clarification because of the CJEU’s prior arguably conflicting decisions on the issue.

The Advocate General opined that an EU Member State is not precluded from denying the deduction of final losses incurred by a foreign permanent establishment from the taxable profits of its resident head-office, when the relevant income tax treaty includes the exemption method to avoid double taxation. 

The Advocate General noted that based on settled case law, foreign permanent establishments taxable only in the state where they are established, and by way of symmetry allowed to deduct losses only in that jurisdiction, are not in objectively comparable situations with permanent establishments established in the same state as the head-office. Thus, the German tax regime does not restrict the freedom of establishment.

The CJEU is not bound by the Advocate General's opinion. It remains to be seen whether the full court will adopt the Advocate General's proposed decision in this case.

Read a May 2022 report [PDF 338 KB] prepared by the KPMG member firm in Germany

 

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