On December 17, 2015 the Court of Justice of the European Union (CJEU) judged in Case C‑388/14 Timac Agro Deutschland GmbH versus Finanzamt Sankt Augustin, (ECLI:EU:C:2015:829).
· Is Article 49 TFEU to be interpreted as precluding a provision such as Paragraph 52(3) of the EStG, in so far as the cause of the reincorporation of losses of a foreign permanent establishment previously taken into account by way of a tax reduction is the sale of that permanent establishment to another company limited by shares within the same group as the seller, and not the making of profits?
· Is Article 49 TFEU to be interpreted as precluding a provision such as Article 23(1)(a) of the German-Austrian Convention — according to which income from Austria is to be exempt from the basis of assessment for German taxation if that income can be taxed in Austria — if losses accrued in an Austrian permanent establishment of a German company limited by shares can no longer be taken into account in Austria because the permanent establishment is sold to an Austrian company limited by shares belonging to the same group as the German company?
The dispute in the main proceedings and the questions referred for a preliminary ruling
· Timac Agro is a company limited by shares that is governed by German law and belongs to a French group. It had, since 1997, been operating a permanent establishment situated in Austria. On 31 August 2005, that establishment was transferred, for consideration, to a company established in Austria belonging to the same group of companies as Timac Agro.
· The question as to how to treat the losses of that non-resident permanent establishment thus arose because, between 1997 and 2005, that establishment had incurred losses in respect of every tax assessment period except 2000 and 2005.
· Following a tax inspection, the tax bases of Timac Agro were corrected in respect of the years 1997 to 2004. First, the losses of the permanent establishment situated in Austria, which were initially deducted from Timac Agro’s revenue for 1997 and 1998, were reincorporated into that company’s taxable profit for 2005. Secondly, Timac Agro was not permitted to take into account the losses of that permanent establishment in its tax base for the years 1999 to 2004.
· Timac Agro objected to those corrections and brought an action before the Finanzgericht Köln (Finance Court, Cologne). In support of its action, Timac Agro argues that the reincorporation of the losses incurred by its permanent establishment in Austria in respect of 1997 and 1998 and the impossibility of deducting that establishment’s losses in respect of the period 1999 to 2004 are incompatible with the freedom of establishment.
· As regards the reincorporation of the losses in question, the referring court considers that the Court of Justice has not yet ruled on whether such reincorporation following the transfer of a non-resident permanent establishment is compatible with EU law.
· The referring court states that although there are some similarities between the facts giving rise to the judgment in Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt (C‑157/07, EU:C:2008:588) and the facts in the case brought before it, the issue under consideration in that judgment was the reincorporation of losses into the tax base of the non-resident permanent establishment to the extent of its profits. By contrast, in the main proceedings, the reincorporation of losses was triggered by the transfer of the non-resident permanent establishment and was not linked to any profits of that establishment.
· In the event that the Court of Justice should find that the principles arising from that judgment are also intended to be applied in a case such as that in the main proceedings, the referring court enquires whether the principles relating to definitive losses laid down by the Court in paragraphs 55 and 56 of the judgment in Marks & Spencer (C‑446/03, EU:C:2005:763) are intended to be applied to the losses relating to the tax years 1997 and 1998 which, having been reincorporated, are no longer taken into account in Germany.
· As regards the refusal to take into account the losses of the permanent establishment situated in Austria for the 1999 to 2004 tax years, the referring court states that, under the German-Austrian Convention, the Republic of Austria had exclusive power to tax the revenue of that establishment. The rules set out in that Convention on the avoidance of double taxation cover not only profits but also losses. Timac Agro’s action could therefore only succeed if that Convention infringed the freedom of establishment.
· The referring court also enquires whether, in the case before it, there are definitive losses for the purposes of the principles set out in paragraphs 55 and 56 of the judgment in Marks & Spencer (C‑446/03, EU:C:2005:763). It points out that, as yet, it has been unable to identify the criteria to be applied in determining the situations in which those principles are to apply.
· In those circumstances the Finanzgericht Köln (Finance Court, Cologne) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
1. Is Article 49 TFEU to be interpreted as precluding a provision such as Paragraph 52(3) of the EStG, in so far as the cause of the reincorporation of losses of a foreign permanent establishment previously taken into account by way of a tax reduction is the sale of that permanent establishment to another company limited by shares within the same group as the seller, and not the making of profits?
2. Is Article 49 TFEU to be interpreted as precluding a provision such as Article 23(1)(a) of the German-Austrian Convention — according to which income from Austria is to be exempt from the basis of assessment for German taxation if that income can be taxed in Austria — if losses accrued in an Austrian permanent establishment of a German company limited by shares can no longer be taken into account in Austria because the permanent establishment is sold to an Austrian company limited by shares belonging to the same group as the German company?
The CJEU ruled as follows:
1. Article 49 TFEU must be interpreted as not precluding a Member State’s tax regime, such as that at issue in the main proceedings, under which, in the event of transfer by a resident company to a non-resident company within the same group of a permanent establishment situated in another Member State, the losses previously deducted in respect of the establishment transferred are reincorporated into the taxable profit of the transferring company where, under a double taxation convention, the income of such a permanent establishment is exempt from tax in the Member State in which the company to which that establishment belonged has its seat.
2. Article 49 TFEU is to be interpreted as not precluding a Member State’s tax regime, such as that at issue in the main proceedings, which, in the event of transfer by a resident company to a non-resident company within the same group of a permanent establishment situated in another Member State, excludes the possibility, for the resident company, of taking into account in its tax base the losses of the establishment transferred where, under a double taxation convention, the exclusive power to tax the profits of that establishment lies with the Member State in which the establishment is situated.
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Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).
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