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09 July 2018 CJEU rules loss of PE may be available to offset profits of jointly-taxed Danish companies On 4 July 2018, the Court of Justice of the European Union (CJEU) decided case C-28/17, NN, and held that Danish tax law was incompatible with the freedom of establishment under Article 49 of the Treaty on the Functioning of the European Union (TFEU), because the loss of a Danish permanent establishment (PE) could not be offset against the profits of jointly-taxed Danish group companies in a situation where the loss could, in fact, not be offset against the taxable income of the nonresident company in its state of residence. Danish resident group companies, Danish PEs and real estate of nonresident group companies are subject to mandatory joint taxation in Denmark. The taxable income of each entity is calculated on a standalone basis and then added together. In this way, losses of one entity may offset the profits of another entity. However, a loss of a PE cannot be used by the other jointly-taxed entities if the loss, in principle, can be offset against taxable profits of the nonresident company in its country of residence. The purpose of this rule is to prevent double deduction of losses. The case concerned a Danish parent company with two Swedish subsidiaries each with a PE in Denmark. The group decided to transfer the PE of one of the Swedish subsidiaries to the other Swedish subsidiary with the effect that there would be only one PE in Denmark. The group elected to make the transfer on a tax-exempt basis for Swedish tax purposes, whereas the transfer was made on a taxable basis for Danish tax purposes. This difference in tax treatment of the transfer caused the acquiring Swedish company to obtain goodwill for Danish tax purposes that was amortizable, whereas no goodwill arose for Swedish tax purposes. The amortization of goodwill for Danish tax purposes caused the PE to realize a tax loss, whereas no tax loss was realized for Swedish tax purposes. For this reason, the Danish tax loss was in fact not deductible for Swedish tax purposes. The Danish joint taxation was filed based on the assumption that the loss of the PE could be used by other entities comprised by the joint taxation structure because the loss was in fact not able to be deducted in Sweden. The tax authorities disagreed with this interpretation of the law and disallowed the transfer of the loss. This decision was upheld by the National Tax Tribunal. Upon appeal, the Eastern High Court requested the CJEU to determine whether Danish law was compatible with the freedom of establishment. The CJEU held that the tax treatment of a Danish group with a PE in Denmark through a nonresident subsidiary is less favorable compared to the tax treatment of a Danish group where all companies are resident. The question whether the situations were objectively comparable should be evaluated on the basis of the aim pursued by the national law as well as their purpose and content. The aim of the national law at stake was to prevent double deduction of losses. At the outset, a group that included a nonresident company with a resident PE was held not to be in a comparable situation with a group with resident companies. However, if the loss of a PE could not be offset against taxable profits in the state of residence of the nonresident subsidiary, the two categories of groups would be a comparable situation. The CJEU then went on to examine whether the national law was justified by an overriding reason in the public interest, in the case of the balanced allocation of powers of taxation and the need to prevent a double deduction of losses. According to the CJEU, the national law could not be justified by a need to ensure a balanced allocation of powers of taxation, because the right to claim a tax deduction twice would not interfere with the Member State's power of taxation. Regarding the need to prevent a double deduction, the CJEU noted that the Danish law was in principle justified since a group with nonresident subsidiaries could be in a more favorable situation compared to a group with resident companies, if the possibility of a double deduction was not prevented. However, the Danish law was not proportional because it prevented utilization of the loss in the Danish joint taxation situation even in the case where the loss in fact could not be used by the nonresident subsidiary in its state of residence. In summary, the CJEU held that the Danish taxation was incompatible with the freedom of establishment. The decision means that Denmark will be required to amend its rules on losses incurred by a PE and allow such losses to be used by other entities in a Danish joint taxation structure, if the losses, in fact, cannot be used by the nonresident group company in its state of residence. The decision should be of relevance for nonresident group companies in other EU Member States and European Economic Area countries. The case concerned income year 2008 and the tax returns for prior years may be reopened for taxpayers with a similar fact pattern.
Document ID: 2018-5830 |
