• 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.

Bech-Bruun’s comments
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 is situated.

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.

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