- Professional News
- 24 January 2018
CJEU Bevola case: Danish tax law deemed to be in conflict with EU law
On 12 June 2018, the Court of Justice of the European Union (CJEU) rendered its judgment in the matter of Bevola against the Danish Ministry of Taxation, C-650/16, in which the CJEU states that the fact that Danish company may not deduct the losses of a permanent establishment situated in another Member State in connection with the closing of such permanent establishment is, under certain circumstances, contrary to EU law rules.
Applicable Danish tax rules
S. 8(2) of the Danish Corporation Tax Act (selskabsskatteloven) provides that a Danish company, on stating its taxable income, may not allow either revenue or expenditure attributable to real estate or a permanent establishment situated in a foreign country to be included in its tax base.
All Danish companies, real estate and permanent establishments considered to be affiliated under Danish law form part of a group subject to mandatory national joint taxation. This also applies in a situation where the parent company of, for instance, two Danish affiliated companies is situated in another Member State, or a company situated in another Member State is inserted into the affiliation structure of two Danish companies. This means that the companies are taxed according to a national group tax relief scheme.
Under Danish tax rules, resident companies may also opt into an international joint taxation scheme, which encompasses non-resident companies, permanent establishments and real estate. However, this scheme is subject to a principle requiring that groups of companies operating globally must include every affiliated non-resident company, real estate and permanent establishments in the Danish joint taxation scheme. It is also of essential interest that, if a Danish company opt into an international joint taxation scheme, such decision is binding on the company for a period of 10 years. Originally, this 10-year period was introduced to prevent groups from opting into the international joint taxation scheme for brief intervals only due to temporary losses internationally.
Facts of the case
The case concerns Bevola A/S, a company resident in Denmark. In 2009, Bevola A/S had subsidiaries and permanent establishments in a number of Member States, including Finland. It was resolved in 2009 to close the permanent establishment in Finland, but it was not possible to claim tax relief in Finland for the DKK 2.8m loss incurred by the permanent establishment.
Bevola A/S applied for permission to deduct the losses incurred by its permanent establishment in Finland for the purposes of corporation tax in Denmark. The Danish tax authorities rejected the application under reference to s. 8(2) of the Danish Corporation Tax Act, which provides that neither revenue nor expenditure attributable to a permanent establishment situated in a foreign country may be included in the Danish taxable income, unless the company has opted for the international joint taxation scheme.
The ruling of the CJEU
In its judgment, the CJEU states that the legislation of a Member State in accordance with which a company resident in that State may deduct from the basis of assessment for corporation
tax the losses of a national permanent establishment but not those of a permanent establishment situated in another Member State, in which those losses may definitively not be taken into account, and where the permanent establishment will not have any future income, is not compatible with EU law rules (and restricts the freedom of establishment).
In reaching its decision the CJEU emphasised the facts of the case in which it apparently was not possible to deduct the losses in Finland and the permanent establishment could not be expected to generate future income in which the losses could be deducted – but this is ultimately for the national court to decide. As a result of this, and because the request for a preliminary ruling was phrased
to cover situations that included the
facts emphasised by the CJEU, the
CJEU did not further consider the
implications of the option to apply
international joint taxation. As the
nature of the rules on international
joint taxation is to prevent double
taxation and double non-taxation,
the rules were immaterial to the case
if the losses could definitively not be
deducted in another state.
The judgment of the CJEU decisively
deems Danish tax law contrary to
EU law (restricting the freedom of
establishment) even if only in certain
special cases. As such, an amendment
to the applicable Danish tax
laws must be adopted. Irrespective of
the nature of such amendment, it will
have a potential impact on all Danish
companies with permanent establishments
in other Member States. The
impact – as evidenced by the facts
of the case and the wording of the
judgment – will depend partly on
the tax laws of the Member State in
which the permanent establishment
The judgment may also result in a
possibility for Danish companies with
permanent establishments in other
Member States being given the
option to amend their tax assessments
retroactively, but this is, of
course, yet to be determined.