On the consideration of final losses of an exempt permanent establishment

On the consideration of final losses of an exempt permanent establishment

In the course of the termination or sale of a foreign permanent establishment, a loss carryforward previously held there may be lost without being taken into account for tax purposes in past or future assessment periods; this results in so-called final losses. Although this approach is consistent, particularly in the case of foreign permanent establishments whose income is exempt from taxation in Germany under treaty law (so-called exempt permanent establishments), due to the so-called principle of symmetry, it is nevertheless sometimes the subject of judicial review. In its ruling of September 22, 2022 (Case No. C-538/20), the ECJ has now commented on a corresponding constellation in the context of a request for a preliminary ruling by the German Federal Fiscal Court (Bundesfinanzhof, BFH) of November 6, 2019 (Case No. I R 32/18).

In the disputed case, a German-based stock corporation (AG) maintained a branch in the United Kingdom in the years 2004 to 2007, the tax losses of which were lost there due to the closure of the branch. The AG therefore requested that the final losses be taken into account when determining its income taxable in Germany for the 2007 assessment period, although the income - and thus also the final losses - of the branch were exempt from domestic taxation under treaty law. The BFH ultimately suspended the proceedings and referred the question to the ECJ as to whether the accompanying failure to take final losses into account constitutes a breach of the freedom of establishment guaranteed under EU law.

Pursuant to EU law, there is, in principle, an obligation to recognize losses on a cross-border basis. Otherwise, a taxpayer could be prevented from setting up a foreign permanent establishment if he had to expect that he would be denied the offset of losses from foreign permanent establishments, whereas a loss deduction would be possible in a comparable constellation in Germany. However, this does not mean that every (foreign) loss in Germany must be taken into account without exception. Instead, an objective comparability test must be carried out.

If Germany, as the country of residence of the AG, waives its right to tax the branch located in the UK under treaty law, the resulting final losses are ultimately also based on the intended division of taxation sovereignty. In the opinion of the ECJ, however, such a constellation is not comparable to a taxpayer with unlimited tax liability in Germany who suffers losses from a domestic permanent establishment. Therefore - also with regard to the freedom of establishment guaranteed under EU law - no corresponding loss consideration is required. The BFH shall now implement the requirements of the ECJ in a binding manner in its final ruling.