Background

The taxpayer in the case was a Dutch tax resident company that incurred a loss of EUR 2.7 million in the Netherlands in tax year 2007. In 2008, it set up a branch (permanent establishment (PE)) in the Czech Republic. In 2009, the taxpayer transferred its place of effective management to the address of the Czech branch, and subsequently also transferred its tax residence to the Czech Republic. The taxpayer retained both its registered seat and entry in the commercial registry in the Netherlands.

In 2012, the taxpayer put in an application to the Czech tax authorities to deduct its 2007 Dutch tax losses from its Czech corporation tax base. The Czech tax authorities denied the deduction. Under Czech domestic law, only losses incurred in the Czech Republic may be carried forward and offset in a future tax year; the law generally does not allow the import of losses from another EU member state.

Following domestic court proceedings, the Czech Supreme Administrative Court asked the CJEU for a preliminary ruling on whether:

1. The freedom of establishment principle in article 49 of the Treaty on the Functioning of the European Union (TFEU) covers the transfer of a company’s place of management from one member state to another; and
2. If so, whether a company can rely on that provision to claim a tax loss incurred in its member state of origin.

Decision of the CJEU

On the first question, the CJEU ruled that a transfer of a company’s place of management to another EU member state, without that transfer affecting the company’s status as a company incorporated under Dutch law, falls within the scope of the freedom of establishment principle.

As to the second question, the CJEU noted that the possibility to deduct a loss from taxable profits in subsequent tax years constitutes a tax advantage. Therefore, legislation of a member state (Czech Republic) that denies a company that transferred its place of management the right to use losses incurred while it was a resident in another EU member state in a previous year leads to different treatment of that company and a company that has always been a resident in the Czech Republic, and is able to deduct losses incurred in a previous year. Such rules may deter companies from transferring their place of effective management to another EU member state and, therefore, may be in violation of the freedom of establishment unless they relate to cases that are not objectively comparable or the rules can be justified by an overriding reason in the public interest. The CJEU decided that the freedom of establishment was not breached in the case at hand because the situation of companies that incurred losses in another EU member state is not comparable to the situation of companies without any activity in another member state.

The CJEU’s opinion is that since the host member state (the Czech Republic in this case) does not have tax jurisdiction over the tax year in which the losses outside that member state arose, the position of a company that transferred its place of effective management to the host state is not comparable to that of a company whose profits are subject to the tax jurisdiction of the host member state in the tax year in which the losses arose. In addition, the Czech rules could be justified by the objective to prevent the double deduction of losses.

The court concluded that the freedom of establishment does not require a host member state to take into account tax losses incurred by a company before the company transfers its tax residence to that state.

The CJEU confirmed that, in general, the TFEU offers no guarantee to companies that transferring their place of management from one EU member state to another EU member state will be tax neutral.

The complete ruling in the AURES case (C-405/18) is available on the CJEU‘s website.