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Article 52 of the EC Treaty guarantees to all EU enterprises the freedom to establish themselves anywhere in the European Union (freedom of establishment). In a decision dated 15 May 1997 (IStR 1997, 366), the European Court of Justice held that it violates EU law for a Member State to require the domestic branch establishment of an entity with its legal seat in another EU country to keep books in the Member State in accordance with this Member State's domestic law in order to qualify for a net operating loss carryforward or carryback. (While the decision speaks of a branch establishment, it would apparently apply to any domestic permanent establishment of an entity resident in another EU country, whether rising to the level of a branch establishment in the German sense of sec. 13 ff. HGB or not.)

The case involved a suit brought by a French S.A. with respect to its Luxembourg branch establishment. However, German tax law contains a provision similar to that apparently involved in the litigation (sec. 50 par. 1 sentence 3 EStG). While the German provision speaks only of the necessity for losses to be supported by documentation "stored" or "held for safekeeping" (aufbewahrt) in Germany, it appears likely that it is likewise in violation of EU law to the extent that it makes a loss carryforward/carryback for non-resident taxpayers contingent upon fulfilment of this requirement.

The decision of the European Court of Justice also casts doubts on the validity of sec. 146 par. 2 AO (requiring books to be kept [gefuehrt], as well as held for safekeeping, in Germany) as it applies to German permanent establishments of entities resident in other EU countries.

The decision of the European Court of Justice is expected to lead to revision of the pertinent passages in the draft directive on the taxation of permanent establishments reported on in article no. 77.
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