Opinion of Advocate General Collins delivered on 10 March 2022.

• Jurisdiction: European Union
• ECLI: ECLI:EU:C:2022:184
• Date: 10 March 2022
• Celex Number: 62020CC0538
• Court: Court of Justice (European Union)

Provisional text

OPINION OF ADVOCATE GENERAL

COLLINS

delivered on 10 March 2022(1)

Case C‑538/20

Finanzamt B

v

W AG,

joined party:

Bundesministerium der Finanzen

(Request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany))

(Reference for a preliminary ruling – Articles 43 and 48 EC – Freedom of establishment – Corporation tax – Trade tax – Deduction of losses incurred by a permanent establishment situated in a Member State and belonging to a company situated in another member State – Avoidance of double taxation by exemption of the income of the non-resident permanent establishment – Comparability of the situations – Concept of ‘final losses’)

I. Introduction

1. By the present request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany), the Court of Justice is asked, in substance, to determine whether a resident parent company has the right, on the basis of Article 43 EC read in conjunction with Article 48 EC, (2) to deduct from its taxable income losses incurred by its non-resident permanent establishment, which has ceased activity as a result of which those losses can no longer be taken into account in the State where that non-resident permanent establishment is located, in circumstances where the profits and losses of that non-resident establishment are exempt from tax in the State of residence of the parent company under a convention for the avoidance of double taxation.

2. The request has been made in the context of a dispute between a company established in Germany, W, and the German tax authorities concerning the latters’ refusal to take account, for the purpose of determining the amount of the former’s liability to corporation tax and the basis of its assessment to trade tax for the 2007 tax year, of the final losses (3) incurred by its branch situated in the United Kingdom. In particular, the issue arises as to whether the approach taken by the Court in the judgment in Bevola and Jens W. Trock (4) in relation to the issue of the objective comparability of the respective situations of residents and non-residents with regard to the deductibility of final losses can be transposed to the present case, where the exemption of the profits – and symmetrically of the losses – of the non-resident permanent establishment is derived from a bilateral convention for the avoidance of double taxation and not, as in the case that gave rise to the abovementioned judgment, from a unilateral provision of national law.

II. Legal context

A. Convention for the avoidance of double taxation concluded between Germany and the United Kingdom

3. On 26 November 1964, the Federal Republic of Germany concluded with the United Kingdom of Great Britain and Northern Ireland a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and fortune (‘the Convention’). (5)

4. Article III(1) of the Convention is worded as follows:

‘The industrial or commercial profits of an enterprise of one of the territories shall be subjected to tax only in that territory unless the enterprise carries on a trade or business in the other territory through a permanent establishment situated therein. If it carries on a trade or business in that other territory through a permanent establishment situated therein, tax may be imposed on those profits in the other territory but only on so much of them as is attributable to that permanent establishment.’

5. Article XVIII(2)(a) of the Convention provides:

‘Tax shall be determined in the case of a resident of the Federal Republic as follows:

(a) Unless the provisions of subparagraph (b) below apply, there shall be excluded from the basis upon which Federal Republic tax is imposed any item of income from sources within the United Kingdom and any item of capital situated within the United Kingdom which, according to this Convention, may be taxed in the United Kingdom provided that capital gains referred to in paragraph (1) of Article VIII shall be so excluded only if they are subject to tax in the United Kingdom. The Federal Republic, however, retains the right to take into account in the determination of its rate of tax the items of income and capital so excluded.

…’

B. German law

6. Paragraph 1 of the Körperschaftsteuergesetz (Law on corporation tax, ‘the KStG’), (6) in the version in force at the time of the facts in the main proceedings, provides:

‘(1) The following corporations, associations of persons and pools of assets which have their management or their registered office on national territory shall have unlimited liability to corporation tax:

1. capital companies (in particular European companies, public limited liability companies, limited liability companies and limited partnerships);

…

(2) The unlimited obligation to pay corporation tax applies to all income.

…’

7. Paragraph 8(2) of the KStG, in the version in force at the time of the facts in the main proceedings, stipulates that all the income of a taxpayer with unlimited tax liability is to be regarded as arising from industrial or commercial activity.

8. Paragraph 2(1) and (2) of the Gewerbesteuergesetz (Law on trade tax, ‘the GewStG’), (7) in the version in force at the time of the facts in the main proceedings, reads as follows:

‘(1) ¹Any industrial or commercial activity which is carried out within national territory shall be subject to the trade tax. ²An industrial or commercial activity means an industrial or commercial undertaking within the meaning of the Einkommensteuergesetz [(Law on Income Tax, “the EStG”)]. ³An industrial or commercial activity shall be regarded as carried out within Germany when a permanent business establishment is maintained for that activity on German territory …

(2) ¹Activity carried out by capital companies (in particular European companies, public limited liability companies, limited liability companies and limited partnerships) … shall in all cases be regarded in its entirety as an industrial or commercial activity.

…’

9. Under the first sentence of Paragraph 7 of the GewStG, in the version in force at the time of the facts in the main proceedings, trading profit is the profit, determined in accordance with the provisions of the EStG or the KStG, deriving from industrial or commercial activity, which is to be taken into account in calculating the income for the tax period, increased and reduced by the amounts referred to in Paragraphs 8 and 9 of the GewStG.

III. The dispute in the main proceedings and the questions referred for a preliminary ruling

10. W is a public limited company the registered office and place of management of which are located in Germany. It is active in the trading of securities. Its financial year end is 30 June.

11. In August 2004, W opened a branch in the United Kingdom. The branch having made no profit, W decided, in February 2007, to close it down. The Commercial Register of the United Kingdom records that cessation of the branch’s operation was completed during the first half of 2007.

12. Due to its closure, the losses incurred by the branch during the 2004/2005, 2005/2006 and 2006/2007 financial years (2005, 2006 and 2007 tax years) could no longer be carried forward in the United Kingdom for tax purposes. The United Kingdom tax authorities therefore informed W that, inclusive of the 2007/2008 financial year and thereafter, it was no longer necessary to submit a tax return for its branch.

13. W claimed that, ‘for reasons of EU law’, the abovementioned losses incurred by its branch should be taken into account as final losses in determining its taxable income in Germany for the 2007 tax year, notwithstanding that the branch income was exempt from tax in Germany by virtue of the Convention. The Finanzamt B (Tax Office B, Germany) refused to take account of those losses in order to determine the amount of W’s liability to corporation tax and the basis of its assessment of trade tax for that tax year.

14. By a judgment of 4 September 2018, the Hessiches Finanzgericht (Finance Court, Hessen, Germany) upheld W’s action challenging that refusal. Tax Office B appealed to the referring court against that judgment on a point of law (Revision). The Bundesministerium der Finanzen (Federal Ministry of Finance, Germany) joined the proceedings as an intervener in support of Tax Office B.

15. The referring court takes the view that the appeal is well founded as a matter of German law.

16. As regards the assessment to corporation tax, the referring court states that, although W is subject to unlimited corporation tax liability on all its income in accordance with Paragraph 1(1) of the KStG, the losses incurred by its permanent establishment in the United Kingdom cannot reduce the basis of assessment to that tax by reason of Article XVIII(2)(a) of the Convention, which excludes from the basis of assessment of German tax any item of income from sources within the United Kingdom which may be taxed in the latter State. It observes that, although Article III(1) of the Convention expressly mentions ‘industrial or commercial profits’ only, by reason of Article XVIII(2)(a) of the Convention, ‘negative income’ – such as the losses claimed by W – is also excluded from the basis for the assessment to German tax. That approach corresponds to the settled case-law of the referring court and the ‘principle of symmetry’. (8)

17. As for the assessment to trade tax, the referring court recalls that, under Paragraph 7 of the GewStG, trading profit is determined by reference to the provisions of the KStG. Since, on account of the Convention, the income of W’s UK branch, including its ‘negative income’, is excluded from the basis of the assessment of W’s liability to corporation tax, the losses of that branch are similarly excluded from the basis of W’s assessment to trade tax.

18. The referring court is uncertain, however, as to whether the freedom of...