Final foreign permanent establishment losses not deductible

The case

W is a stock corporation headquartered and located in Germany. In August 2004, W opened a branch in the United Kingdom and decided to close it in 2007. Due to the closure, the tax losses of the branch in the UK could no longer be carried forward. W claimed that the aforementioned losses of its branch should be taken into account as final losses for "Union law reasons" when determining its taxable income in Germany for the 2007 assessment period. However, income of the branch is not taxable in Germany under the double taxation agreement (“DTA”) and the tax office in Germany refused to take the losses into account. W filed a lawsuit against it.

The German Federal Financial Court has referred the matter to the European Court of Justice (“ECJ”) for a preliminary ruling because, in its view, with regard to the divergent ECJ rulings Timac Agro (ruling of December 17, 2015, C-388/14) and Bevola/Trock (ruling of June 12, 2018, C-650/16), the treatment of losses in the case of a DTA exemption of the results of permanent establishments in other Member States has not yet been sufficiently clarified.

Jurisdiction of the European Court of Justice

On September 22, 2022 the ECJ ruled that Articles 49 and 54 of the Treaty on the Functioning of the European Union must be interpreted as not precluding a tax regime of a Member State under which a company resident there cannot deduct its final losses from the taxable profits of a company resident in another Member State if the State of residence has waived its right to tax the income under a DTA. According to the ECJ the ruling does not contradict the judgment of Bevola/Trock because Denmark had unilaterally waived its power to exert its taxing rights over the profits and losses incurred in another member state.