The question of the deductibility of final foreign losses is one of the fundamental problems of European tax law. The landmark decision in the "Marks & Spencer" case (C-446/03) was followed by numerous decisions of the European Court of Justice and the national tax courts. A clear line was not always discernible in the ECJ's case law. This prompted the Federal Fiscal Court, Germany's highest court in tax matters, to make a reference to the ECJ on the subject of final losses.
The case referred for a preliminary ruling concerns a basic case of final permanent establishment losses. The plaintiff is a German public limited company. In 2004, it opened a permanent establishment in the United Kingdom. After the British permanent establishment only generated losses, the permanent establishment was closed. Now the plaintiff is seeking to have its foreign permanent establishment losses taken into account in Germany. The German Tax Court asked the ECJ whether, in the case of a DTT exemption for permanent establishments, final foreign losses are to be taken into account in Germany due to the freedom of establishment.
In the specific case, the ECJ answered in the negative, as a domestic permanent establishment and a foreign permanent establishment are not comparable in the case of a DTT exemption. The freedom of establishment does not require that foreign losses be taken into account in Germany in such a case.
With its decision, the ECJ has clarified its previous case law. The ECJ did not comment on the numerous questions regarding the calculation of final losses. Therefore, it is still open, in particular, whether final losses are to be taken into account in the case of permanent establishments if, for example, the progression provision is relevant or so-called switch-over or subject-to-tax clauses are relevant.
Dr Panagiotis, who conducted the proceedings before the ECJ on behalf of the applicant, gave a detailed interview on this topic. You can find it here.