Final loss deduction in Germany
Ingo Prang & Marcus Rösen
by Ingo Prang & Marcus Rösen
The German Federal Fiscal Court (BFH) had submitted a request for a preliminary ruling to the European Court of Justice (ECJ) regarding the deduction of so-called final losses for EU foreign permanent establishments (PEs). In the most recently published ruling of 09 September 2022 (ref. C-538/20), the ECJ ruled that the freedom of establishment does not preclude the non-deductibility of final losses in EU-exemption PE cases.
In the context of a lawsuit that became pending at the BFH in 2018, the BFH referred a total of five legal questions to the ECJ for a preliminary ruling, addressing a large part of the problems regarding final PE losses that had been disputed for years. In the opinion of the BFH the order for reference was justified by the fact that, despite ECJ decisions issued in the past, the fundamental question had not been sufficiently clarified regarding the obligation to take into account final losses, the criteria for finality, and the amount of the loss to be taken into account (if any).
In its ruling of 09 September 2022, the ECJ partially answered the questions submitted by the BFH for a preliminary ruling. In principle, there would be unequal treatment within the meaning of the freedom of establishment, since, on the one hand, losses arising from a PE located in the member state of the resident company are taken into account for tax purposes, while losses from a permanent establishment located in another member state are not deductible for tax purposes in the state of residence. However, according to the ECJ this unequal treatment did not constitute a restriction of the freedom of establishment, since the situation of a DTA-exempt PE was in principle not objectively comparable to that of a resident PE.
The ECJ ruling means that losses of EU foreign exemption PEs, even if final, cannot be taken into account in the country of residence. In the event that the country of residence is Germany, nothing is therefore likely to change. The deductibility of final foreign PE losses would thus be excluded for corporate income tax, income tax, and trade tax purposes.
Even after the long-awaited landmark decision, it can be assumed that the discussion on final losses is not yet over. The last stage on the long road to final clarification has probably not yet been reached. A number of questions, at least from a German tax perspective, still arise, such as: Under what circumstances is there an exemption under treaty law in this context? Would the result be different if a subject-to-tax clause regulated in the DTA were relevant?
In addition, further proceedings are pending before the BFH , in which the court will have the opportunity to comment again on the final losses after the latest ECJ ruling has been issued. It cannot be ruled out that the ECJ will also have to deal with this matter again in the future. Now, however, it is again a matter of waiting for the next stage begins on the journey towards a final clarification.
GGI member firmKPP Steuerberatungsgesellschaft mbHKleve, Emmerich, Weeze, GermanyT: +49 2821 72 04 0
Tax
In the past 25 years, KPP Steuerberatungsgesellschaft mbH has become one of the leading tax consultancy offices in the Lower Rhine region of Germany. The company offers taxation, legal, and consulting services. As KPP is close to the Netherlands, the company has acquired considerable expertise in advising on cross-border matters, especially for foreign companies investing in Germany, e.g. real estate.
Ingo Prang is a German-certified tax advisor and a Partner at KPP. In addition, he lectures on comparative business taxation at the Rhine-Waal University of Applied Sciences. Contact Ingo.
Marcus Rösen is a German-certified tax advisor. In addition, he lectures on comparative business taxation at the Rhine-Waal University of Applied Sciences. Contact Marcus.
