Keywords
Summary

Keywords

1. Freedom of movement for persons – Freedom of establishment – Free movement of capital – Provisions of the Treaty – Scope

(Arts 43 EC and 56 EC)

2. Freedom of movement for persons – Freedom of establishment – Provisions of the Treaty – Scope

(Art. 43 EC)

3. Freedom of movement for persons – Freedom of establishment – Tax legislation – Corporation tax

(Art. 43 EC)

Summary

1. The creation and the outright ownership by a natural or legal person established in a Member State of a permanent establishment not having a separate legal personality situated in another Member State falls within the scope of application ratione materiae of Article 43 EC. Even if it were to be accepted that, by not allowing a resident company to deduct from its tax base losses relating to a permanent establishment belonging to it and situated in another Member State, the tax regime has restrictive effects on the free movement of capital, such effects would have to be seen as an unavoidable consequence of any restriction on freedom of establishment and they do not justify an examination of that regime in the light of Article 56 EC.

(see paras 15-16)

2. The provisions of the EC Treaty concerning freedom of establishment, which prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation, also apply where a company established in a Member State carries on business in another Member State through a permanent establishment, as defined in a relevant double taxation convention, which constitutes, under tax convention law, an autonomous entity.

That definition of a permanent establishment as an autonomous fiscal entity is consonant with international legal practice as reflected in the model tax convention drawn up by the Organisation for Economic Cooperation and Development (OECD). For the purposes of the allocation of fiscal competence, it is not unreasonable for the Member States to draw guidance from international practice and, particularly, the model conventions drawn up by the OECD.

(see paras 19-22)

3. Article 43 EC does not preclude a situation in which a company established in a Member State cannot deduct from its tax base losses relating to a permanent establishment belonging to it and situated in another Member State, to the extent that, by virtue of a double taxation convention, the income of that establishment is taxed in the latter Member State where those losses can be taken into account in the taxation of the income of that permanent establishment in future accounting periods.

It is true that such a tax regime involves a restriction on the freedom of establishment, since the tax situation of a company which has its registered office in one Member State and has a permanent establishment in another Member State is less favourable than it would be if the latter were to be established in the first Member State. By reason of that difference in tax treatment, a resident company could be discouraged from carrying on its business through a permanent establishment situated in another Member State.

Nevertheless, such a tax regime can, in principle, be justified in the light of the need to safeguard the allocation of the power to tax between the Member States and the need to prevent the danger that the same losses will be taken into account twice which, taken together, pursue legitimate objectives compatible with the Treaty and thus constitute overriding reasons in the public interest, provided that the regime is proportionate to those objectives.

With respect to the need to safeguard the allocation of the power to tax between the Member States, the Member State in which the registered office of the company to which the permanent establishment belongs is situated would, in the absence of a double taxation convention, have the right to tax the profits generated by such an entity. Consequently, the objective of preserving the allocation of the power to impose taxes between the two Member States concerned, which is reflected in the provisions of the convention, is capable of justifying the tax regime at issue, since it safeguards symmetry between the right to tax profits and the right to deduct losses. In that connection, where a double taxation convention has given the Member State in which the permanent establishment is situated the power to tax the profits of that establishment, to give the principal company the right to elect to have the losses of that permanent establishment taken into account in the Member State in which it has its seat or in another Member State would seriously undermine a balanced allocation of the power to impose taxes between the Member States concerned.

As regards the danger that the same losses will be used twice, it is possible that a company might deduct, in the Member State in which its seat is situated, losses incurred by a permanent establishment belonging to it and situated in another Member State and that, despite such offsetting, the same losses might be taken into account subsequently in the Member State in which the permanent establishment is situated, when that establishment generates profits, thereby preventing the Member State in which the principal company has its seat from taxing that profit.

(see paras 25-26, 33, 36, 39, 42, 52-54, operative part)