Highlights & Insights on European Taxation 2016, , Timac Agro Deutschland. Reincorporation of the losses deducted previously in the event that the non-resident establishment is transferred

On 17 December 2015, the Court of Justice of the European Union (‘CJ’) delivered its judgment in Timac Agro Deutschland GmbH v Finanzamt Sankt Augustin (C-388/14). The CJ held compatible with the fundamental freedoms the operation of a former recapture mechanism in the German corporate tax system, on the basis of which tax-deducted losses incurred by a resident corporate taxpayer from business activities carried on in another EU Member State through a permanent establishment (‘PE’) situated in that other State were added back to that taxpayer’s corporate tax base upon the transfer of these business activities to an affiliated entity in another Member State. The CJ also held compatible with the fundamental freedoms the non-recognition for German corporate tax base calculation purposes of losses incurred by a resident corporate taxpayer in another Member State from the carrying on of business activities through a PE in that other State. The case concerned a German company that, since 1997, operated a loss-making PE in Austria, which it transferred in 2005 to an Austrian sister-company. Under the application of the German domestic tax rules in place in 2005, the transfer led to a recapture in 2005 of the losses that the German company tax deducted in 1997 and 1998 under the then applicable tax rules. Losses incurred by the German company in the period 1999-2004 were not taken into consideration for German corporate tax base calculation purposes, as these losses were excluded from the taxable base under the German tax rules in place in that period. The applicable German-Austrian tax treaty provisions assigned taxing rights involving PE-profits to the PE-country, i.e., Austria in the relevant case. The CJ held the German tax treatment not to infringe the freedom of establishment. The CJ considered (i) the recapture upon the business transfer in 2005 of the losses deducted for German tax purposes earlier in 1997 and 1998 justified, as the Protocol to the then applicable tax treaty required Germany to exempt from taxation any profits derived by resident corporate taxpayers from their business operations carried on through PEs situated in Austria. The CJ considered (ii) the exclusion from the German taxable base of Austrian PE-losses incurred during 1999-2004 to constitute a circumstance different from that of a local loss-making branch whose losses are included in the German taxable base. The CJ held such a different circumstance present, as the applicable tax treaty exclusively assigned any taxing rights involving PE profits to Austria.