CELEX: 62007CJ0157
Freedom of establishment
European Economic Area Agreement (EEA)
Tax legislation
Tax treatment of losses incurred by a permanent establishment situated in a Member State of the EEA and belonging to a company having its seat in a Member State of the European Union

The reference for a preliminary ruling concerns the interpretation of Article 31 of the European Economic Area Agreement of
2 May 1992 (JO 1994, L 1, p. 3, ‘the EEA Agreement’).
It has been submitted in a dispute between the Finanzamt für Körperschaften III in Berlin (‘the Finanzamt’) and Krankenheim
Ruhesitz am Wannsee-Seniorenheimstatt GmbH (‘KR Wannsee’) concerning the tax treatment in Germany of losses incurred by a
permanent establishment situated in Austria and belonging to KR Wannsee.

Legal context

International law
Article 6 of the EEA Agreement provides:
‘Without prejudice to future developments of case-law, the provisions of this Agreement, in so far as they are identical in
substance to corresponding rules of the Treaty establishing the European Economic Community and the Treaty establishing the
European Coal and Steel Community and to acts adopted in application of these two Treaties, shall, in their implementation
and application, be interpreted in conformity with the relevant rulings of the Court of Justice of the European Communities
given prior to the date of signature of this Agreement.’
Article 31 of the EEA Agreement reads:
‘Within the framework of the provisions of this Agreement, there shall be no restrictions on the freedom of establishment
of nationals of an EC Member State or an EFTA [European Free Trade Association] State in the territory of any other of these
States. This shall also apply to the setting-up of agencies, branches or subsidiaries by nationals of any EC Member State
or EFTA State established in the territory of any of these States.
Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and
manage undertakings, in particular companies or firms within the meaning of Article 34, second paragraph, under the conditions
laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions
of Chapter 4.’
…’
The second paragraph of Article 34 of the EEA Agreement provides:
‘“Companies or firms” means companies or firms constituted under civil or commercial law, including cooperative societies,
and other legal persons governed by public or private law, save for those which are non-profit-making.’
The Agreement concerning the avoidance of double taxation with respect to taxes on income and capital and to trade and property
taxes  concluded between the Federal Republic of Germany and the Republic of Austria on 4 October 1954 (BGBl. 1955 II, p. 749),
as amended by the Agreement of 8 July 1992 (BGBl. 1994 II, p. 122; ‘the German-Austrian Agreement’), provides in Article 4:
‘(1)      Where a person domiciled in one of the Contracting States derives income, as owner or partner, from a business enterprise
whose activities extend to the territory of the other State, the said income shall be taxable by the latter State only in
so far as it is attributable to a permanent establishment of the enterprise which is situated in its territory.
(2)      In this connection, the income to be attributed to a permanent establishment shall be that which would have accrued to it
if it had been an independent enterprise engaged in the same or similar activities under the same or similar conditions and
had carried on its activities as an independent enterprise.
(3)      For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business in which an enterprise
carries on all or part of its activities.
...’
Article 15 of the German-Austrian Agreement provides:
‘(1)      The State of domicile shall have no right to tax if, in the foregoing articles, such right has been assigned to the other
State
…
(3)      Paragraph (1) shall not preclude the State of domicile from raising taxes on the income and properties left thereto for taxing
at the rate corresponding to the total income and total property of the taxable person.’
Article 12(b) of the protocol of 24 August 2000 to the Agreement concerning the avoidance of double taxation with respect
to taxes on income and capital and to trade  and property taxes, concluded between the Federal Republic of Germany and the
Republic of Austria on 4 October 1954 (BGBl. 2002 II, p. 734), stipulates that losses incurred as from the business year 1998
are to be taken into account on the basis of reciprocity in the State where the permanent establishment concerned is situated.
That provision is worded as follows:
‘Where persons resident in Germany incur, from the business year 1990 (1989/90) onwards, losses in establishments situated
in Austria, losses incurred up to the 1997 (1996/97) business year inclusive shall be taken into account in accordance with
Article 2a(3) of the German Law on Income Tax (Einkommenssteuergesetz, BGBl. 1988 I, p. 1093; “the EStG”).  As from the tax
year 1994, the taking into account of sums initially deducted, in accordance with the third sentence of Article 2a(3) of the
EStG shall not apply.  Where tax treatment cannot be carried out in accordance with those provisions in Germany, given the
definitive nature of the taxation and the impossibility of restarting the procedure by reason of the expiry of the period
laid down for determination of the tax, account may be taken in Austria in the form of a deduction of losses.  Losses incurred
as from the business year 1998 (1997/98) must be taken into account in the State where the establishment is situated in accordance
with the principle of reciprocity.  The above rules apply only in so far as they do not cause losses to be taken into account
twice.’

German law
Article 2(1) of the Law on tax measures applicable to the investments of German undertakings abroad (Gesetz über steuerliche
Maßnahmen bei Auslandsinvestitionen der deutschen Wirtschaft (Auslandsinvestitionsgesetz) of 18 August 1969 (BGBl. 1969 I,
p. 1211; ‘the AIG’), which was in force at the time of the facts in the main proceedings, was worded as follows:
‘Where, under a double taxation agreement, a fully-taxable person is to be exonerated from income tax in relation to the results
of an industrial or commercial undertaking established in a foreign State, it is appropriate, at the request of the taxable
person, to deduct, in the calculation of the total amount of income, a loss arising from those results in accordance with
the provisions of national tax law, where that loss could be offset or deducted by the taxpayer, if that income did not have
to be exonerated, and where it exceeds the positive income of an industrial or commercial activity, arising from other operations
in the same foreign State, exonerated by virtue of that agreement.  Where that does not involve the offsetting of the loss,
deduction of the latter is allowed where the conditions laid down in Article 10d of the EStG are met.  The deducted amount,
in accordance with the first and second sentences, must again be taken into account in the calculation of the total amount
of income, for the taxation period concerned, where, in one of the following taxation periods, an overall profit arises from
the results of an industrial and commercial activity from operations established in that foreign State, that positive income
being exonerated in accordance with the agreement in question.  The third sentence does not apply where the taxpayer shows
that, by virtue of the provisions laid down by the foreign State which are applicable to him, he is not authorised to deduct
those losses from results other than those of the year during which the loss was incurred.’
From 1990 onwards, the rules on the right to deduct were set out in Article 2a(3) of the EStG.

Austrian law
Until 1988, Austrian tax law made no provision for the carrying forward of losses incurred by partially-taxable companies,
i.e. by permanent establishments belonging to companies based in the territory of a State other than the Republic of Austria.
It was only in 1989 that the deduction of losses incurred by those permanent establishments was introduced in Austria, including
in relation to losses incurred before 31 December 1988, during the preceding seven years.
Such carrying forward was however allowed in relation to losses incurred by permanent establishments situated in the territory
of the Republic of Austria and belonging to companies established in another State, i.e. by partially-taxable taxpayers, only
if the undertaking concerned did not make any profit overall, i.e. as regards its worldwide income.  Losses incurred by a
permanent establishment situated in Austria could therefore be taken into account only in so far as they were greater than
the profits made outside the scope of the partial taxation.  Moreover, such a deduction was possible only in so far as the
losses were determined on the basis of regular accounting and had not already been taken into account in taxation during previous
tax years.

The dispute in the main proceedings and the questions referred for a preliminary ruling
KR Wannsee, the respondent in an appeal on a point of law (‘Revision’), is a limited liability company established in Germany
which operated a permanent establishment situated in Austria from 1982 to 1994.  Before the end of 1990, it made losses for
that establishment totalling DEM 2 467 407, of which DEM 36 295 related to that year.
At the request of KR Wannsee, those losses were taken into account by the Finanzamt, the appellant in the said appeal, in
calculating the taxable amount for that company, that is to say having regard to the profits made in Germany, by the latter,
during the taxation periods corresponding to the years 1982 to 1990.
Between 1991 and 1994, at its permanent establishment in Austria, KR Wannsee made profits of DEM 1 191 672, of which DEM 746 828
were made during the year 1994 which is at issue in the main proceedings. That same year, KR Wannsee disposed of that permanent
establishment.
In accordance with the provisions of German tax law then in force, the Finanzamt added the profits made by the permanent establishment
in Austria during the period 1991 to 1994 to the total income obtained by KR Wannsee in Germany.  The Finanzamt thus retrospectively
taxed the sums previously deducted in the context of national taxation, in respect of the losses incurred by the permanent
establishment in Austria.  In respect of the period of taxation at issue in the main proceedings, namely the year 1994, the
taxable income of KR Wannsee was thus increased by the profits made by that permanent establishment during that year, amounting
to DEM 746 828.
In Austria, KR Wannsee was charged corporation tax in 1992 and 1993, during which business years its permanent establishment
made profits.  On that occasion, the losses previously incurred by that company in the said establishment were not taken into
account.  Having regard to the fact that the Republic of Austria permitted deduction of losses only in the alternative, in
cases where it was not possible to take them into account in the State where the company owning the permanent establishment
was established, and given that KR Wannsee had made profits in Germany between 1982 and 1990, it was refused offsetting of
losses in Austria in respect of the years 1992 and 1993.
As regards 1994, the permanent establishment of KR Wannsee should, in accordance with Austrian tax provisions, have been taxed
on profits made during that year.  However, no assessment to corporation tax was made in Austria for that year, contrary to
what had been the case for 1992 and 1993.
Following the Finanzamt’s decision to calculate the whole of the income derived by KR Wannsee in Germany taking account of
profits made by its permanent establishment in Austria, that company brought an action against the tax notices for the years
1992 to 1994, requesting deduction of the sums which had been reintegrated into the basis for calculation of the tax drawn
up in Germany.  KR Wannsee argued in support of its action that, by reason of the carrying forward of losses in Austria being
limited to seven years, reintegration of those sums on the basis of the provisions of the AIG was unlawful.
The Finanzgericht Berlin dismissed KR Wannsee’s action against the tax notices for 1992 and 1993, but upheld its action against
the tax notice for 1994.
The Bundesfinanzhof, to which the Finanzgericht referred the dispute at final instance on the subject of the reintegration
made in respect of the tax year 1994, expressed doubts as to whether the national legislation complied with Community law.
In those circumstances, the Bundesfinanzhof decided to stay the proceedings and refer the following questions to the Court
of Justice for a preliminary ruling:
‘(1)      Does Article 31 of the [EEA] Agreement prohibit a legal provision of a Member State according to which, when calculating total
income, a taxpayer resident and subject to unlimited taxation in one Member State is able under certain conditions to deduct
losses incurred by a permanent establishment situated in another Member State which are exempt from income tax pursuant to
a double taxation convention,
–        but according to which the sum deducted must, in the tax assessment period concerned, be added back in the calculation of
total income, to the extent to which, in a subsequent tax assessment period, a positive amount of income from commercial activities
which is exempt from tax pursuant to the double taxation convention is generated by permanent establishments in that other
Member State,
–        subject in the latter case to an exception where the taxpayer can prove that, according to the provisions of the other Member
State applicable to him, it is “in general” not possible to claim deduction of losses in a year other than that in which those
losses were incurred, which is not the case where, although a deduction of losses is in general possible according to the
law of that State, it is not available to the taxpayer in the specific situation in which he finds himself?
(2)      If the answer to (1) is in the affirmative: is the position in the State of residence affected if the limitations on deduction
of losses applicable in the other Member State (being the source State) themselves contravene Article 31 of the [EEA] Agreement
on the ground that they discriminate against a taxpayer with income from his permanent establishment who is subject only to
limited taxation there compared with a taxpayer who is subject to unlimited taxation there?
(3)      Further assuming that the answer to (1) is in the affirmative: must the State of residence refrain from retroactive recovery
of tax on losses incurred by a permanent establishment situated in another Member State, to the extent to which those losses
cannot otherwise be deducted in any Member State on the ground that the permanent establishment in that other Member State
has been disposed of?’

The questions referred for a preliminary ruling

The applicability of Article 31 of the EEA Agreement
By way of preliminary observation, it should be noted that the provisions of the EEA Agreement on the freedom of establishment
applied to the relations between the Federal Republic of Germany and the Republic of Austria during the period from 1 January
to 31 December 1994, since the latter State acceded to the European Union on 1 January 1995.
Concerning the scope of those provisions, the Court has held that the rules prohibiting restrictions on the freedom of establishment,
set out in Article 31 of the EEA Agreement, are identical to those imposed by Article 43 EC (Case C‑471/04
Keller Holding
[2006] ECR I‑2107, paragraph 49).  The Court has also held that, in the area in question, the rules of the EEA Agreement
and those of the EC Treaty must be given a uniform interpretation (Case C‑452/01
Ospelt and Schlössle Weissenberg
[2003] ECR I‑9743, paragraph 29; Case C‑286/02
Bellio F.lli
[2004] ECR I‑3465, paragraph 34).
As for the applicability of Article 31 of the EEA Agreement to the facts of the main proceedings, the German Government argues
that, given that, during all the years concerned by the deduction of losses, namely the years 1982 to 1990, the EEA Agreement
was not yet in force, the tax mechanism at issue in the main proceedings cannot be assessed in relation to the said article,
since the relevant time for determining the applicable legislation is that of the initial deduction of the losses.
In that respect, it should be noted that, despite the fact to which attention has thus been drawn, it is not deduction of
losses but reintegration into the basis of assessment which is the element to be assessed by the Court, and that that reintegration
took place in 1994.  Since the EEA Agreement entered into force on 1 January 1994, the tax mechanism at issue in the main
proceedings may be examined in relation to Article 31 of that Agreement.

The existence of a restriction on the right set out in Article 31 of the EEA Agreement
By its questions, which should be examined together, the referring court asks, in substance, whether Article 31 of the EEA
Agreement precludes a national tax system which, having allowed losses incurred by a permanent establishment situated in a
State other than the one in which the company to which that establishment belongs is established to be taken into account
for the purposes of calculating the tax on that company’s income, provides for tax reintegration of those losses at the time
when the said permanent establishment makes profits, where the State where that permanent establishment is situated does not
confer any right to carry forward losses incurred by a permanent establishment belonging to a company established in another
State, and where, by virtue of an agreement between the two States concerned for the prevention of double taxation, the income
of such an entity is exonerated from taxation in the State in which the company to which it belongs has its seat.
Freedom of establishment includes, for companies or firms formed in accordance with the laws of a Member State and having
their registered office, central administration or principal place of business within the Community, the right to pursue their
activities in the Member State concerned through a subsidiary, a branch or an agency (Case C‑307/97
Saint-Gobain ZN
[1999] ECR I‑6161, paragraph 35; Case C‑141/99
AMID
[2000] ECR I‑11619, paragraph 20;
Keller
Holding
, paragraph 29).
The Court has also held that, even though, according to their wording, the provisions of the Treaty concerning freedom of
establishment are directed to ensuring that foreign nationals and companies are treated in the host Member State in the same
way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another
Member State of one of its nationals or of a company incorporated under its legislation (Case C‑264/96
ICI
[1998] ECR I‑4695, paragraph 21; Case C‑298/05
Columbus Container Services
[2007] ECR I‑10451, paragraph 33).
Moreover, it is settled case-law that all measures which prohibit, impede or render less attractive the exercise of that freedom
must be regarded as such restrictions (Case C‑55/94
Gebhard
[1995] ECR I‑4165, paragraph 37; Case C‑442/02
CaixaBank France
[2004] ECR I‑8961, paragraph 11).
Those considerations also apply where a company established in a Member State carries on business in another Member State
through a permanent establishment (Case C‑414/06
Lidl Belgium
[2008] ECR I‑0000, paragraph 20).
Concerning the effects of the German tax system in relation to Community law, it is clear from paragraph 23 of the judgment
in
Lidl Belgium
that provisions which allow losses incurred by a permanent establishment to be taken into account in calculating the profits
and taxable income of the principal company constitute a tax advantage. Granting or not granting such an advantage for a permanent
establishment situated in a Member State other than that in which that company is established must therefore be regarded as
a factor likely to affect the freedom of establishment.
It is true that, unlike the legislation at issue in
Lidl Belgium
, the German tax system at issue in the main proceedings provides that, in the results of the company established in Germany
to which the permanent establishment in Austria belongs, losses made by that permanent establishment are to be taken into
account.
As already pointed out in paragraph 14 of this judgment, all the losses incurred by the permanent establishment in Austria
were, initially, deducted from the profits made by the principal company in the context of that company’s taxation in Germany.
By its action, the Federal Republic of Germany granted a tax advantage to the resident company with the permanent establishment
situated in Austria, in the same way as if that permanent establishment had been situated in Germany.
However, by subsequently proceeding to reintegrate losses by the said permanent establishment into the basis of assessment
of the principal company when the latter had made profits, the German tax system withdrew the benefit of that tax advantage.
Even though that reintegration operated only up to the amount of the profits made by that permanent establishment, the fact
remains that, to that extent, the German legislation thus subjected resident companies with permanent establishments in Austria
to less favourable treatment than that enjoyed by resident companies with permanent establishments situated in Germany.
In those circumstances, the tax situation of a company which has its registered office in Germany and has a permanent establishment
in Austria is less favourable than it would be if the latter were to be established in Germany.  By reason of that difference
in tax treatment, a German company could be discouraged from carrying on its business through a permanent establishment situated
in Austria (
Lidl Belgium
, paragraph 25).
It must therefore be concluded that the tax system at issue in the main proceedings entails a restriction on the right set
out in Article 31 of the EEA Agreement.

The existence of justification
It is clear from the Court’s case-law that a restriction on the freedom of establishment is permissible only if it is justified
by overriding reasons in the public interest. It is further necessary, in such a case, that its application be appropriate
to ensuring the attainment of the objective in question and not go beyond what is necessary to attain it (
Lidl Belgium
, paragraph 27 and case-law cited).
In that respect, the referring court underlines the fact that the income derived by the permanent establishment in Austria
is taxed not in Germany, that is to say in the Member State of residence of the principal company, but in Austria, in accordance
with the provisions of the German-Austrian Agreement.
On that point, it should be noted that the reintegration of losses provided for by the German tax system at issue in the main
proceedings cannot be dissociated from their having earlier been taken into account.  That reintegration, in the case of a
company with a permanent establishment in another State in relation to which that company’s State of residence has no power
of taxation, as the referring court indicates, reflects a logical symmetry.  There was thus a direct, personal and material
link between the two elements of the tax mechanism at issue in the main proceedings, the said reintegration being the logical
complement of the deduction previously granted.
It must be concluded that the restriction which follows from the reintegration thus provided for is justified by the need
to guarantee the coherence of the German tax system.
In that respect, it should be added that that restriction is appropriate to achieve such an objective, in that it operates
in a perfectly symmetrical manner, only deducted losses being reintegrated.
Moreover, that restriction is entirely proportionate to the objective pursued, since the reintegrated losses are reintegrated
only up to the amount of the profits made.
That assessment cannot be called into question by the combined effects, referred to by the referring court in its first and
second questions, of the German tax system and the Austrian tax legislation at issue in the main proceedings.
The referring court states in that regard that the German tax legislation did not provide for a reintegration such as that
at issue in the main proceedings where the taxpayer showed that the provisions applicable to him in a Member State other than
that in which he was established did not in general allow him to benefit from a deduction of losses during years other than
those in which they were incurred, which was not the case where that State provided, in principle, for such a possibility
of deducting losses but that possibility could not be put into effect in the concrete situation in which the taxpayer found
himself.  In the case in the main proceedings, KR Wannsee found itself unable to have the losses incurred between 1982 and
1990 taken into account by the Austrian tax authorities.
On that point, it should be remembered that, according to consistent case-law, in the absence of any unifying or harmonising
Community measures, Member States retain the power to define the criteria for taxing income and wealth with a view to eliminating
double taxation, by means of conventions if necessary (Case C‑290/04
FKP Scorpio Konzertproduktionen
[2006] ECR I‑9461, paragraph 54; Case C‑374/04
Test Claimants in Class IV of the ACT Group Litigation
[2006] ECR I‑11673, paragraph 52; Case C‑231/05
Oy AA
[2007] ECR I‑6373, paragraph 52).
That competence also implies that a Member State cannot be required to take account, for the purposes of applying its tax
law, of the possible negative results arising from particularities of legislation of another Member State applicable to a
permanent establishment situated in the territory of the said State which belongs to a company with a registered office in
the first State (see, to that effect,
Columbus Container Services
, paragraph 51, and Case C‑293/06
Deutsche Shell
[2008] ECR I‑0000, paragraph 42).
The Court has held that freedom of establishment cannot be understood as meaning that a Member State is required to draw up
its tax rules on the basis of those in another Member State in order to ensure, in all circumstances, taxation which removes
any disparities arising from national tax rules, given that the decisions made by a company as to the establishment of commercial
structures abroad may be to the company’s advantage or not, according to circumstances (
Deutsche Shell
, paragraph 43).
Even supposing that the combined effect of taxation in the State where the principal company of the permanent establishment
concerned is situated and tax due in the State where that establishment is situated might lead to a restriction of the freedom
of establishment, such a restriction is imputable only to the latter of those States.
In such a case, that restriction would arise not from the tax system at issue in the main proceedings, but from the allocation
of tax competences under the German-Austrian Agreement.
Nor can the assessment that the restriction arising from the said tax system is justified by the need to ensure the coherence
of that system be called into question by the fact, referred to by the referring court in its third question, that the principal
company disposed of its permanent establishment and that the profits and losses made by that establishment throughout its
existence end with a negative result.
As has been stated in paragraph 42 of this judgment, the reintegration of the amount of the permanent establishment’s losses
in the results of the principal company is the indissociable and logical complement of their having previously been taken
into account.
It follows from the whole of the above considerations that the answer to the questions referred must be that Article 31 of
the European Economic Area Agreement does not preclude a national tax system which, after having allowed the taking into account
of losses incurred by a permanent establishment situated in a State other than the one in which its principal company is situated,
for the purposes of calculating the tax on that company’s income, provides for a tax reintegration of those losses at the
time when that permanent establishment makes profits, where the State where that same permanent establishment is situated
does not confer any right to carry forward losses incurred by a permanent establishment belonging to a company established
in another State, and where, under a convention for the prevention of double taxation between the two States concerned, the
income of such an entity is exonerated from taxation in the State in which the principal company has its seat.

Costs
Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court,
the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs
of those parties, are not recoverable.
On those grounds, the Court (Fourth Chamber) hereby rules:
Article 31 of the Agreement on the European Economic Area of 2 May 1992 does not preclude a national tax system which, after
having allowed the taking into account of losses incurred by a permanent establishment situated in a State other than the
one in which its principal company is situated, for the purposes of calculating the tax on that company’s income, provides
for a tax reintegration of those losses at the time when that permanent establishment makes profits, where the State where
that same permanent establishment is situated does not confer any right to carry forward losses incurred by a permanent establishment
belonging to a company established in another State, and where, under a convention for the prevention of double taxation between
the two States concerned, the income of such an entity is exonerated from taxation in the State in which the principal company
has its seat.
[Signatures]
*
Language of the case: German.