THE CJEU adds to its jurisprudence on the importation of foreign losses
Deloitte Malta Tax Alert
03 March 2020
Aures Holding, Case C-405/18
The case for the transfer of tax losses between EU Member States recently took a new turn in a significant judgement issued by the Court of Justice of the European Union (CJEU) on 27 February 2020.
Czech domestic tax law permits the carry-forward of unutilised tax losses for up to five accounting periods following the year in which they were incurred.
Aures Holdings (Aures), a company incorporated, effectively managed and tax resident in the Netherlands, incurred a significant loss during basis year 2007. In 2009, the company transferred its place of effective management and tax residence from the Netherlands to the Czech Republic, while retaining its registered seat in the Netherlands. Following this change, Aures applied for a deduction of its tax loss incurred in the Netherlands in 2007 from its corporate tax base in the Czech Republic in 2012. Czech tax authorities refused to allow the deduction on the basis that the loss did not arise from an activity in the Czech Republic. Aures claimed the refusal constituted an infringement of its freedom of establishment in terms of Article 49 of the Treaty on the Functioning of the European Union (TFEU).
The CJEU made the following determinations:
- Companies may rely on Article 49 TFEU to contest a receiving state’s refusal to deduct losses incurred prior to the transfer of tax residence to that receiving state. However, the TFEU does not guarantee tax neutral migrations due to disparities between domestic tax legislation in different Member States.
- The Czech rule denying the deduction of pre-migration losses creates differential treatment. However:
- a company resident in a Member State (EU MS A) that has incurred a loss in EU MS A; and
- a company that has transferred its tax residence to another Member State (EU MS B) having incurred a loss during a tax year during which it was a tax resident of EU MS A, without any activity in EU MS B are not objectively comparable.
- The finality concept, first elucidated upon in Marks and Spencer (C-446/03) (and subsequently confirmed by Bevola and Jens W. Trock (C-650/16)), was not developed further due to factual variances pertaining to the underlying proceedings.
In light of these circumstances, the CJEU held that the TFEU does not preclude legislation that excludes the possibility for a company, which has transferred its place of effective management and, as a result, its tax residence to that Member State, from claiming a tax loss incurred, prior to that transfer, in another Member State, in which it has retained its registered seat.
Maltese law perspective
The CJEU’s decision in Aures does not affect the Maltese position in relation to loss carry-forward entitlement. In terms of article 14(1)(g) of the Income Tax Act, trading losses suffered by a taxpayer may be carried forward indefinitely, and may furthermore be utilised against all future chargeable income and capital gains. However, foreign trading losses are not deductible where, had the foreign loss been a foreign profit, such profit would not have been chargeable to tax under Maltese tax legislation (for e.g. because such loss was a foreign source loss derived by a non-resident taxpayer). The Aures decision reinforces Malta’s right to refuse importation of negative items of income where the corresponding positive items of income would not have otherwise been brought to charge in Malta (subject, of course, to the Marks & Spencer dictum).
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