Case C‑538/20

Finanzamt B

v

W AG

(Request for a preliminary ruling from the Bundesfinanzhof)

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

(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)

1. Freedom of movement for persons – Freedom of establishment – Provisions of the Treaty – Scope – Activity carried out by a company resident in another Member State through a permanent establishment – Included

   (Arts 49 and 54 TFEU)

   (see paragraphs 14, 15)

2. Freedom of movement for persons – Freedom of establishment – Tax legislation – Corporation tax – Taking into account of final losses – Member State in which the company is resident and which, under a double taxation convention, has waived its power to tax the profits of a permanent establishment situated in another Member State – Tax regime authorising the deduction by a resident company of the losses incurred by its permanent establishment situated in the Member State of residence of that company but excluding that deduction for losses incurred by a permanent establishment situated in another Member State – Whether permissible

   (Arts 49 and 54 TFEU)

   (see paragraphs 17-22, 27-29, operative part)

Résumé

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, ( 1 ) 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 ( 2 ) 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 company from carrying on its business through a permanent establishment situated in another Member State. That difference in treatment is permissible only if it concerns situations which are not objectively comparable, or if it is justified by an overriding reason in the public interest proportionate to that objective.

In that respect, as regards measures laid down by a Member State in order to prevent or mitigate the double taxation of a resident company’s profits, companies which have a permanent establishment in another Member State are not, in principle, in a comparable situation to that of companies possessing a resident permanent establishment, except where the national tax legislation itself treats those two categories of establishment in the same way for the purposes of taking into account the losses and profits made by them.

However, where, as in the present case, the Member State in which a company is resident has waived, pursuant to a double taxation convention, the exercise of its power to tax the profits of the non-resident permanent establishment of that company, situated in another Member State, the situation of a resident company possessing such a permanent establishment is not comparable to that of a resident company possessing a resident permanent establishment in the light of the measures taken by the first Member State in order to prevent or mitigate the double taxation of resident companies’ profits and, symmetrically, the double deduction of their losses.

( 1 ) 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.

( 2 ) 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).