Judgment of the Court Fourth Chamber of 22 September 2022, W Deductability of final losses of a non-resident permanent establishment, C-538/20

• Date: 22 September 2022
• Year: 2022

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4. FREEDOM OF MOVEMENT: FREEDOM OF ESTABLISHMENT

Judgment of the Court (Fourth Chamber) of 22 September 2022, W (Deductability of final

losses of a non-resident permanent establishment), C-538/20

Link to the full text of the judgment

Reference for a preliminary ruling – Freedom of establishment – Articles 49 and 54 TFEU – Deduction of

final losses incurred by a non-resident permanent establishment – State which has waived its power to

impose taxes under a double taxation convention – Comparability of situations

W AG, a public limited company operating a securities trading bank, is resident for tax purposes in

Germany. In August 2004, W opened a branch in the United Kingdom. As that branch did not make a

profit, W closed it during the first half of 2007, so that the losses incurred by that establishment could

not be carried forward in the United Kingdom for tax purposes.

Finanzamt B (Tax Office B, Germany) refused to take into account those losses when calculating the

tax payable by W in Germany in respect of 2007. W challenged that refusal before the Hessiches

Finanzgericht (Finance Court, Hesse, Germany) which, by judgment of 4 September 2018, upheld W’s

action.

Tax Office B brought an appeal on a point of law against that judgment before the Bundesfinanzhof

(Federal Finance Court, Germany), the referring court. That court notes that, although W is liable in

Germany to corporation tax and business tax in respect of its entire income, in accordance with the

German legislation,

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the losses incurred by its permanent establishment situated in the United

Kingdom are excluded from the basis of assessment of its corporation tax under a double taxation

convention

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which exempts foreign profits from corporation tax, those profits being taken into

account, however, for the purposes of the determination of the applicable tax rate. The same is true

in respect of business tax. The referring court has doubts as to whether that exclusion is compatible

with freedom of establishment since, unlike losses incurred by a permanent establishment situated in

another Member State, resident companies may take into account the losses incurred by a resident

permanent establishment for the determination of their taxable income.

By its judgment, the Court of Justice finds, however, that there is no restriction on freedom of

establishment, since those two situations are not objectively comparable.

Findings of the Court

The Court rules that Articles 49 and 54 TFEU do not preclude a tax system of a Member State under

which a company resident in that Member State may not deduct from its taxable profits the final

losses incurred by its permanent establishment situated in another Member State where the Member

State of residence has waived its power to tax the profits of that permanent establishment under a

double taxation convention.

It is true that such a tax system establishes a difference in treatment between a resident company

which has a permanent establishment situated in another Member State and a resident company

which has a resident permanent establishment. Such a difference could discourage a resident

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Paragraph 1(1) of the Körperschaftsteuergesetz ( Law on corporation tax) and the Gewerbesteuergesetz (Law on business tax), which refers

to the determination of profits subject to corporation tax for the calculation of the basis of assessment for business tax.

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Article XVIII(2) of the Convention of 26 November 1964 between the Federal Republic of Germany and the United Kingdom of Great Britain

and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion, as amended by an addendum of 23 March

1970 (BGBl. 1966 II, p. 359; BGBl. 1967 II, p. 828, and BGBl. 1971 II, p. 46).