According to an opinion by the Advocate General, the Danish rules on the possibilities of deducting losses of permanent establishment situated outside Denmark in a Danish company's tax assessment are in conflict with EU law.
On 18 January 2018, the Advocate General published his opinion in the matter of Brevola, C-650/16, in which he states that the fact that a Danish company may not deduct the losses of a permanent establishment situated in another Member State in connection with the closing of such permanent establishment is contrary to EU law rules.
Applicable Danish tax rules S. 8(2) of the Danish Corporation Tax Act (selskabsskatteloven) provides that a Danish company, on stating its taxable income, may not allow either revenue or expenditure attributable to real estate or a permanent establishment situated in a foreign country to be included in its tax base.
All Danish companies, real estate and permanent establishments considered to be affiliated under Danish law form part of a group subject to mandatory national joint taxation. This also applies in a situation where the parent company of, for instance, two Danish affiliated companies is situated in another Member State, or a company situated in another Member State is inserted into the affiliation structure of two Danish companies. This means that the companies are taxed according to a national group tax relief scheme.
Under Danish tax rules, resident companies may also opt into an international joint taxation scheme, which encompasses non-resident companies, permanent establishments and real estate. However, this scheme is subject to a principle requiring that groups of companies operating globally must include every affiliated non-resident company, real estate and permanent establishments in the Danish joint taxation scheme. It is also of essential interest that, if a Danish company opt into an international joint taxation scheme, such decision is binding on the company for a period of 10 years. Originally, this 10-year period was introduced to prevent groups from opting into the international joint taxation scheme for brief intervals only due to temporary losses internationally.
Facts of the case The case concerns Bevola A/S, a company resident in Denmark. In 2009, Bevola A/S had subsidiaries and permanent establishments in a number of Member States, including Finland. It was resolved in 2009 to close the permanent establishment in Finland, but it was not possible to claim tax relief in Finland for the DKK 2.8m loss incurred by the permanent establishment.
Brevola A/S applied for permission to deduct the losses incurred by its permanent establishment in Finland for the purposes of corporation tax in Denmark. The Danish tax authorities rejected the application under reference to s. 8(2) of the Danish Corporation Tax Act, which provides that neither revenue nor expenditure attributable to a permanent establishment situated in a foreign country may be included in the Danish taxable income, unless the company has opted for the international joint taxation scheme.
The opinion of the Advocate General In his opinion, the Advocate General states that the legislation of a Member State in accordance with which a company resident in that State may deduct from the basis of assessment for corporation tax the losses of a national permanent establishment but not those of a permanent establishment situated in another Member State, in which those losses may definitively not be taken into account, is not compatible with EU law rules (and restricts the freedom of establishment).
The Advocate General finds that although the parent company may opt into an international joint taxation scheme, such option is not sufficient to prevent that legislation being incompatible with EU law.
Comments by Bech-Bruun The opinion of the Advocate General will most likely be acted on in the course of 2018, resulting in a final decision by the Court of Justice of the European Union (CJEU). Should the CJEU agree with the Advocate General, Danish tax law will be deemed contrary to EU law (restricting the freedom of establishment). Such situation will call for an amendment to applicable Danish tax laws; and such amendment to legislation may have an impact on all Danish companies with permanent establishments in other Member States.
In case the CJEU rules in favour of the Danish company, it can result in a possibility for Danish companies with permanent establishments in other Member States to amend their tax assessments back in time.
Bech-Bruun monitors the development of the case.