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- Issues Raised By AMID
The decision recently handed down by the European Court of Justice (ECJ) in the matter of AMID NV suggests that central aspects of German tax law on cross-border loss utilisation are in violation of the freedom of establishment clause of the EC Treaty (Article 43; formerly, Article 52). As pointed out by Gert Saß (Der Betrieb 2001, 508), the judgement raises two questions:
- Does European Union law mandate the deductibility of losses arising in a foreign permanent establishment even where corresponding profits would be exempt from taxation in the company's home state?
- Is European Union law violated by refusing to permit the inclusion of foreign subsidiaries in groups whose profits and losses are consolidated for tax purposes?
- Facts Of The Case
Amid NV was a Belgian company with a permanent establishment in Luxembourg. In 1981, AMID suffered a loss from its Belgian operations, while its Luxembourg permanent establishment earned a profit of slightly greater magnitude. This profit was tax exempt in Belgium under its tax treaty with Luxembourg. In the following year, AMID generated a profit in Belgium as well. AMID sought to deduct its 1981 Belgian losses from its 1982 Belgian profits.
The deduction was denied because of a clause in the Belgian income tax code permitting a company's domestic losses to be carried forward only to the extent they exceeded its foreign profits. The same section permitted domestic profits to be reduced by foreign losses even where corresponding gains were exempt under a tax treaty. Under these provisions, AMID's 1981 Belgian loss was offset by its 1981 Luxembourg profit and could not be carried forward to 1982.
AMID contested its tax assessment in the Belgian courts arguing that the relevant provisions of Belgian tax law were in violation of the freedom of establishment clause of the EC Treaty. The Ghent Court of Appeal referred the question to the European Court of Justice.
- Belgium's Position And ECJ's Holding
Belgium defended its system on the grounds that it was, on the whole, balanced. While companies that sustained occasional domestic losses while consistently earning foreign profits were at a disadvantage, companies could not predict their future earnings so accurately as to let this deter them from setting up foreign permanent establishments. The ability to deduct foreign losses both in Belgium and, in later years, in the jurisdiction where the permanent establishment was located put some companies in a better overall tax position than if they had operated only inside Belgium. Furthermore, the fact that Belgium could not tax foreign permanent establishment profits meant that some differences in the treatment of Belgian residents with foreign permanent establishments were justified.
The European Court of Justice rejected these arguments, stating that the benefit which the system conferred on some companies did not justify the burden it imposed on others. The court could discern no "objective difference," sufficient to justify different loss treatment, between a Belgian company operating solely in Belgium and a Belgian company with a Luxembourg permanent establishment. The fact that permanent establishment profits were tax exempt in Belgium was not a sufficient difference in the court's eyes.
- Relevance For German Tax Law
German law currently does not allow its taxpayers to deduct foreign business losses where corresponding gains would be exempt under a tax treaty. Until 1999, the German tax code allowed such deductions on an elective basis subject to later recapture. German tax law likewise does not permit the inclusion of foreign corporations in tax consolidated groups.
AMID suggests that tax treaty limitations on Germany's ability to tax the profits of foreign permanent establishments are not sufficient reason for disallowing the deduction of business losses sustained in other EU countries while allowing the deduction of business losses incurred domestically. Similarly, AMID suggests that it violates the freedom of establishment clause of the EC Treaty to permit consolidation of the profits and losses of domestic subsidiaries for tax purposes, but to deny this benefit to subsidiaries located in other EU countries.
- Relationship To Singer Decision
We reported in article no. 87 on the European Court of Justice's judgement of 15 May 1997, in which it held that an EU member state violates EU law by requiring the domestic branch establishment of an entity with its legal seat in another EU country to keep its books in the member state in order to qualify for a net operating loss carryforward or carryback.
The Singer decision struck down formal limitations on loss utilisation, just as AMID strikes down substantive limitations on loss utilisation.
Germany has yet to adjust its tax laws to take account of Singer, which casts doubt on the validity of § 50 (1) sentence 3 EStG (denying a loss carryforward to non-residents if books and records are not maintained in Germany) and § 146 (2) sentence 1 AO (requiring books and records to be kept and held for safekeeping in Germany) as regards the German permanent establishments and subsidiaries of EU companies.
Münch (DB 2000, 2140) concedes that § 146 (2) AO is probably inconsistent with EU law and argues that, where the German permanent establishments of EU enterprises apply for permission under § 148 AO to keep books and records in another EU member state, such permission must be granted as long as the tax authorities' access to the foreign books is comparable to that which bookkeeping in Germany would permit. He states that tax authority access to the taxpayer's electronic systems will often be necessary to ensure this. "Electronic audit" provisions were included in Germany's 2000 tax reform bill and take effect in 2002 (see article no. 213).
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