Opinion of the Advocate General — ECLI:EU:C:2022:184
Date: 2022-03-10
Language of the case: German
Subject matter: Right of establishment
Procedure: Reference for a preliminary ruling
Origin: Germany

Summary of the request for a preliminary ruling pursuant to Article 98(1) of 
the Rules of Procedure of the Court of Justice 
Date lodged: 
21 October 2020 
Referring court: 
Bundesfinanzhof (Germany) 
Date of the decision to refer: 
6 November 2019 
Defendant and appellant in the appeal on a point of law: 
Finanzamt B 
Applicant and respondent in the appeal on a point of law: 
W AG 
  
Subject matter of the main proceedings 
Freedom of establishment – Article 43 EC – Corporation tax – Local business 
tax – Resident company – Non-resident permanent establishment – Closure – 
Losses – Taking account of the losses of the non-resident permanent 
establishment – Final losses – Possibility of opening a new permanent 
establishment – Ability to carry forward  losses earlier – Relevant rules for 
calculating profits 
Subject matter and legal basis of the reference 
Interpretation of EU law, Article 267 TFEU 
Questions referred 
1. Is Article 43, in conjunction with Article 48, of the Treaty establishing the 
European Community (now Article 49, in conjunction with Article 54, of the 
Treaty on the Functioning of the European Union) to be interpreted as 
EN 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-538/20 
 
2  
precluding legislation of a Member State which prevents a resident company 
from deducting losses incurred by a permanent establishment in another 
Member State from its taxable profits where, first, the company has 
exhausted the possibilities to deduct those losses available under the law of 
the Member State in which the permanent establishment is situated and, 
second, it has ceased to receive any income from that establishment, so that 
there is no longer any possibility of account being taken of the losses in that 
Member State (‘final’ losses), if the legislation in question concerns an 
exemption for profits and losses under a bilateral convention for the 
avoidance of double taxation between the two Member States? 
2. If the first question is answered in the affirmative: Is Article 43, in 
conjunction with Article 48, of the Treaty establishing the European 
Community (now Article 49, in conjunction with Article 54, of the Treaty on 
the Functioning of the European Union) to be interpreted as also precluding 
the legislation under the German Gewerbesteuergesetz (Law on local 
business tax) which prevents a resident company from deducting from its 
taxable business earnings ‘final’ losses of the type referred to in the first 
question of a permanent establishment in another Member State? 
3. If the first question is answered in the affirmative: In the event of the closure 
of the permanent establishment in the other Member State, can there be 
‘final’ losses of the type referred to in the first question, even though there is 
at least a theoretical possibility that the company might once more open in 
the Member State concerned a permanent establishment, any profits of 
which could be offset against the previous losses? 
4. If the first and third questions are answered in the affirmative: Can the losses 
of the permanent establishment which, under the law of the State in which 
that establishment is situated, could have been carried forward to a 
subsequent tax period on at least one occasion also be considered to be 
‘final’ losses of the type referred to in the first question of which account is 
to be taken by the State in which the parent establishment is resident? 
5. If the first and third questions are to be answered in the affirmative: Is the 
obligation to take account of cross-border ‘final’ losses limited as to amount 
by the amounts of losses which the company could have calculated in the 
State in which the permanent establishment is situated, were the taking 
account of losses not precluded there? 
Provisions of Community law cited 
Article 43 EC (now Article 49 TFEU) 
Article 48 EC (now Article 54 TFEU) 
W 
 
3 
Provisions of national law cited 
Grundgesetz für die Bundesrepublik Deutschland (Basic Law of the Federal 
Republic of Germany, ‘the GG’) (in the revised version published in the 
Bundesgesetzblatt, Part III, subsection number 100-1, most recently amended by 
Article 1 and second sentence of Article 2, of the Law of 29 September 2020 
[BGBl. I p. 2048]), in particular the third sentence of Article 28(2), Article 72(2), 
Article 105(2) and the first, second and fourth sentences of Article 106(6) 
Convention between the Federal Republic of Germany and the United Kingdom 
of Great Britain and Northern Ireland for the Avoidance of Double Taxation and 
the Prevention of Fiscal Evasion of 26 November 1964 (BGBl. 1966 II p. 359) (as 
amended by the revising Protocol of 23 March 1970 [BGBl. 1971 II p. 46]), in 
particular the first and second sentences of Article III, paragraph 1, and Article 
XVIII, paragraph 2, the first and second sentences of subparagraph (a) and 
subparagraph (b) 
Einkommensteuergesetz (Law on income tax, ‘the EStG’) (in the version 
applicable to the 2007 assessment period), in particular Paragraph 4(1) 
Körperschaftsteuergesetz (Law on corporation tax, ‘the KStG’), (in the version 
applicable to the 2007 assessment period), in particular point 1 of Paragraph 1(1) 
and Paragraph 8(1) and (2) 
Gewerbesteuergesetz (Law on local business tax, ‘the GewStG’) (in the version 
applicable to the 2007 assessment period), in particular Paragraph 1, the first and 
third sentences of Paragraph 2(1), and the first sentence of Paragraph 2(2), the 
first sentence of Paragraph 5(1), the first sentence of Paragraph 7, Paragraphs 8 
and 9, the first, second, sixth and seventh sentences of Paragraph 10a, the first and 
second sentences of Paragraph 11(1), Paragraph 14 and Paragraph 16(4) 
Abgabenordnung (Tax Code, ‘the AO’) (in the version published on 1 October 
2002 [BGBl. I p. 3866; 2003 I p. 61], last amended by Article 7 of the Law of 
12 August 2020 [BGBl. I p. 1879]), in particular Paragraph 3(2) 
Brief summary of the facts and procedure 
1 The applicant and respondent in the appeal on a point of law is an 
Aktiengesellschaft (public limited company). Its registered office and place of 
management are located in Germany. A branch in the United Kingdom that had 
been opened in August 2004 was closed in the first half of 2007 after having 
incurred losses. 
2 The applicant and respondent in the appeal on a point of law has a financial year 
not based on the calendar year, ending on 30 June of each year. Due to the 
closure, the losses of the branch from the 2004/2005, 2005/2006 and 2006/2007 
financial years could no longer be carried forward in the United Kingdom. The 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-538/20 
 
4  
applicant and respondent in the appeal on a point of law therefore wishes to have 
account taken of those losses, which it calculated in accordance with the German 
rules for calculating profits, as final losses in Germany in the 2007 tax period for 
the purposes of determining the income relevant for corporation tax and local 
business tax (taxable income or business earnings). The Finanzamt B (tax office 
of B, ‘the Finanzamt’) refuses to allow this. 
3 The applicant and respondent in the appeal on a point of law brought an action 
against that refusal. It was successful at first instance. 
4 The referring court is now called upon to rule on the appeal on a point of law 
brought by the Finanzamt against the judgment at first instance. The 
Bundesministerium der Finanzen (Federal Ministry of Finance), which joined the 
proceedings as an intervener, supports, in substance, the position taken by the 
Finanzamt. 
Brief summary of the grounds for the reference 
5 Under German law it is not possible to take account of the losses of a branch, as 
the applicant and respondent in the appeal on a point of law seeks to do. The 
losses incurred in the United Kingdom are excluded, from the outset, from the 
basis of assessment for corporation tax under the double taxation convention 
concerned and therefore do not form part of the business earnings, which are 
based on the profit to be calculated under the provisions of the Law on corporation 
tax. 
6 The first sentence of Article III, paragraph (1), of the DBA-Great Britain 
1964/1970 (Double Taxation Convention – Great Britain) provides that the 
industrial or commercial profits of an undertaking of one of the territories are to 
be subject to tax only in that territory unless the undertaking carries on a trade or 
business in the other territory through a permanent establishment situated therein. 
If, through a permanent establishment in the other territory, the undertaking 
carries on a trade or business through a permanent establishment situated therein, 
the profits of the undertaking may be taxed in the other territory, but only to the 
extent to which they are attributable to that permanent establishment (second 
sentence of Article III, paragraph 1, of the DBA-Great Britain 1964/1970). Under 
the first sentence of Article XVIII, paragraph 2(a), of the DBA-Great Britain 
1964/1970, in the case of a person resident in Germany there is to be an exclusion 
from the basis of assessment of German tax in respect of income from sources 
within the United Kingdom (Great Britain) and capital situated within Great 
Britain, which in accordance with that Convention can be taxed in Great Britain, 
unless Article XVIII, paragraph 2(b), of the DBA-Great Britain 1964/1970 
applies, which is indeed not so in the present case. However, Germany retains the 
right to take such excluded income and capital into account when setting the tax 
rate (second sentence of Article XVIII, paragraph 2(a), of the DBA-Great Britain 
1964/1970). 
W 
 
5 
7 Although in the first sentence of Article III, paragraph 1, of the DBA-Great 
Britain 1964/1970 only profit from industrial or commercial activity is expressly 
mentioned, under Article XVIII, paragraph 2(a), of the DBA-Great Britain 
1964/1970 negative income is also to be excluded from the basis of assessment for 
corporation tax in the State of residence. Under settled case-law, even if the 
concept of income applied in accordance with the convention rules on distribution 
refers to a net amount, losses are also to be excluded from the basis of assessment 
of German tax (the so-called ‘symmetry theory’). 
8 For the applicant as a public limited company subject to unlimited corporation tax, 
in relation to which, in accordance with Paragraph 8(2), in conjunction with point 
1 of Paragraph 1(1), of the KStG, all income is to be treated as income from 
industrial or commercial activity, the starting point for determining the business 
earnings is consequently the profit determined in accordance with the provisions 
of the Law on corporation tax for the year 2007. Income, including such negative 
income, which under an agreement on avoidance of double taxation is to be 
excluded from the basis of assessment for corporation tax, therefore does not form 
part of the business earnings as provided for in Paragraph 7(1) of the GewStG 
from the outset. Use of the provision in Paragraph 9(3) of the GewStG, in 
accordance with which the basis of assessment for local business tax of a domestic 
undertaking is to be reduced by the amount of the business earnings, which is 
allocated to a non-domestic permanent establishment, is not required in situations 
involving exemption from tax under a convention  
9 EU law could require account to be taken of the branch’s losses, as sought by the 
applicant and respondent in the appeal on a point of law , in terms of freedom of 
establishment (Article 43 EC, now Article 49 TFEU) if 
– the situation of the applicant and respondent in the appeal on a point of law 
(cross-border situation) is objectively comparable to the situation of a company 
with a branch in Germany (purely domestic situation), and 
– the restriction of the freedom of establishment is not justified (final losses). 
10 The referring court cites the following judgments of the Court of Justice in that 
regard: 
– of 13 December 2005, Marks & Spencer (C-446/03, EU:C:2005:763); 
– of 15 May 2008, Lidl Belgium (C-414/06, EU:C:2008:278); 
– of 17 December 2015, Timac Agro Deutschland (C-388/14, EU:C:2015:829); 
– of 12 June 2018, Bevola and Jens W. Trock (C-650/16, EU:C:2018:424). 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-538/20 
 
6  
Whether it is objectively comparable 
Corporation tax (question 1) 
11 In the present case, the cross-border situation differs from a purely domestic 
situation primarily due to the fact that, by virtue of the double taxation 
convention, the losses concerned are from the outset not subject to the tax 
jurisdiction of the Federal Republic of Germany. 
12 However, in accordance with the judgment of the Court of Justice of 12 June 
2018, Bevola and Jens W. Trock (C-650/16, EU:C:2018:424), objective 
comparability must be assessed with regard to the purpose of the national 
provisions at issue. The application of different tax rules of national law to a 
domestic company depending on whether it has a resident permanent 
establishment or a non-resident permanent establishment is not in itself a decisive 
factor.  
13 The purpose of the double taxation convention is, amongst other things, to prevent 
the double deduction of losses. Thus, the situation of a company with unlimited 
tax liability which maintains a non-resident branch with final losses does not 
differ from that of a company with unlimited tax liability whose resident branch 
has incurred such losses. 
14 The question is whether it makes a difference in that regard whether the difference 
in treatment (account not taken of losses) is based on a unilateral provision of 
national law – as in the case underlying  the Court of Justice’s judgment of 
12 June 2018 in Bevola and Jens W. Trock (C-650/16, EU:C:2018:424) – or on a 
bilateral convention – as in the present case. In that context, it is stated in the case-
law and legal literature that the purpose of the double taxation convention also 
consists in allocating taxation powers between countries. It is also stated that, by 
virtue of the double taxation convention, Germany waived its taxation right in 
relation to the losses at issue in the present case. 
15 As regards the purpose of the double taxation convention, it should be noted in 
general that, in order to achieve the objective of avoiding double taxation, the 
contracting States chose, in respect of income from permanent establishments, the 
exemption method, by which the right to tax is attributed to only one of the 
contracting States, namely the State in which the permanent establishment is 
situated. 
16 In contrast to the credit method, under which both contracting States retain their 
respective powers of taxation and the State of residence merely undertakes to 
offset the tax incurred in the source State against its own tax, under the exemption 
method the State of residence completely waives its right to tax based on its own 
sovereignty. That waiver is comprehensive and does not depend on actual taxation 
in the source State. It therefore applies even if the source State does not tax the 
income.  
W 
 
7 
17 The exemption method is based on the concept that the State from which the 
income originates has a ‘better’ right to tax; the exempting State therefore gives 
way. In economic terms, the exemption method should bring about a level playing 
field in the source State among investors from different countries (capital import 
neutrality). 
18 The objective of taxation on the basis of the ability to pay tax, as referred to in the 
judgment of the Court of Justice of 12 June 2018, Bevola and Jens W. Trock 
(C-650/16, EU:C:2018:424), is a general, abstract principle of taxation. It is not 
appropriate to add to the exemption method under the convention an additional 
purpose that is not already expressed in the specific objectives of avoiding double 
taxation and the double deduction of losses. 
Local business tax (question 2) 
19 As regards local business tax also, the cross-border situation in the present case 
differs from the purely domestic situation primarily due to the fact that, by virtue 
of the double taxation convention, the losses concerned are, from the outset, not 
subject to the tax jurisdiction of the Federal Republic of Germany. Like 
corporation tax, local business tax falls within the scope of the double taxation 
convention. Owing to the reference to the rules for calculating profits that are 
applicable to corporation tax, income – including negative income – which under 
the double taxation convention is to be excluded from the basis of assessment for 
corporation tax does not form part of the basis of assessment for local business tax 
from the outset either. 
20 There appears therefore to be no reason why the requirements of EU law and the 
primacy of those requirements should not also apply to local business tax. 
21 Regarding the purposes of local business tax, it should be noted that it is an 
object-related municipal tax that is payable in addition to income tax or 
corporation tax. 
22 Historically, local business tax is based on the principle of equivalence. It is 
intended to provide compensation for the specific burdens imposed on 
municipalities by industry, trade and crafts, such as the development of land for 
construction, the creation of traffic areas, the operation of local public transport, 
the construction and maintenance of roads, hospitals and cultural and other 
municipal establishments. 
23 The basis of assessment for local business tax is the profits deriving from 
industrial or commercial activity, calculated in accordance with the provisions of 
the Law on income tax or the Law on corporation tax. However, that is increased 
by certain additions and reduced by certain deductions, resulting in a difference in 
the profit calculated in accordance with the provisions of the Law on income tax 
or the Law on corporation tax and therefore also in a difference in the subjective 
concept of ability to pay tax. 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-538/20 
 
8  
24 The main argument put forward against taking account of final losses within the 
framework of local business tax is that that tax has a structural domestic 
connection (principle of territoriality) and is object-related. 
25 Unlike corporation tax, which is based on the principle of taxing companies on 
their worldwide profits, local business tax does not in fact require any 
symmetrically applied protection by means of a double taxation convention. 
26 Moreover, the United Kingdom does not actually have a non-personal tax that is 
comparable to the German local business tax. The exclusion of the deduction of 
losses in local business tax is based primarily on the fact that, from the outset, the 
source State, the United Kingdom, did not permit the deduction of losses for local 
business tax purposes. Germany was not obliged under EU law to bear the 
consequences of that decision of the source State. That follows from the judgment 
of the Court of Justice of 23 October 2008, Krankenheim Ruhesitz am Wannsee-
Seniorenheimstatt (C-157/07, EU:C:2008:588). 
Final losses 
Finality 
– Possibility of opening a new permanent establishment (question 3) 
27 The referring court has to date considered that the losses of a foreign permanent 
establishment are final within the meaning of the case-law of the Court of Justice 
if, for factual reasons, account can no longer be taken of the losses in the source 
State or if, although it is theoretically still possible to deduct them in that State, it 
is virtually impossible to deduct them for factual reasons and a subsequent 
deduction nevertheless carried out, contrary to expectations, could still be 
reviewed retrospectively under procedural law in the domestic territory. 
28 Accordingly, it must be found that final losses exist in the present case. By 
dismissing the employees and transferring the lease for the rented premises, the 
applicant and respondent in the appeal on a point of law did everything to 
terminate its activity in the United Kingdom and to convince the court that it was 
unlikely that any income and, above all, any profit would be realised by a branch 
in the United Kingdom from which the losses incurred until the closure could be 
deducted in the future. 
29 According to the most recent case-law of the Court of Justice, namely the 
judgments 
– of 19 June 2019, Memira Holding (C-607/17, EU:C:2019:510, paragraph 25 et 
seq.) and 
– of 19 June 2019, Holmen (C-608/17, EU:C:2019:511, paragraph 37 et seq.), 
W 
 
9 
30 it is however unclear  
– whether it is not also necessary to examine whether, under the law applicable in 
the State in which the permanent establishment is situated, it would have been 
conceivable for third parties to exploit the losses, for example after the 
permanent establishment had been incorporated into a corporation and the 
shareholding subsequently sold; and 
– whether the theoretical possibility that the company could at any time one more 
open in the Member State concerned a permanent establishment, any profits of 
which could be offset against the previous losses, does not preclude an 
assessment that there are final losses. 
– Ability to carry forward losses earlier (question 4) 
31 In addition to the losses incurred in the tax period in which the permanent 
establishment was closed (2007 tax period, 2006/2007 financial year), the 
applicant and respondent in the appeal on a point of law claims that account 
should also be taken of those losses which were incurred in the previous tax 
periods (2005 and 2006, 2004/2005 and 2005/2006 financial years) and in respect 
of which it is to be assumed that, under United Kingdom tax law, they could be 
carried forward to the subsequent tax period in each case. 
32 The Federal Ministry of Finance takes the view that a loss which could have been 
carried forward at a certain point in time but was not carried forward can no 
longer be regarded as a final loss. 
33 It cites the following judgment of the Court of Justice in that respect: 
– of 3 February 2015, Commission v United Kingdom (C-172/13, 
EU:C:2015:50). 
34 The view taken by the Federal Ministry of Finance is in line with the view taken 
by Advocate General Kokott in the following Opinions: 
– of 10 January 2019, Memira Holding (C-607/17, EU:C:2019:8, point 57 et 
seq.); 
– of 10 January 2019, Holmen (C-608/17, EU:C:2019:9, point 50 et seq.). 
Applicable rules for calculating profits (question 5) 
35 The applicant and respondent in the appeal on a point of law calculated the alleged 
losses of the United Kingdom branch on the basis of the German rules for 
calculating profits. 
36 That is in line with the existing case-law of the referring court and the Court of 
Justice. According to that case-law, the domestic rules for calculating profits are 
SUMMARY OF THE REQUEST FOR A PRELIMINARY RULING – CASE C-538/20 
 
10  
applicable, because the obligation to take account of cross-border losses on an 
exceptional basis under EU law is to be derived from the need for equal treatment 
of companies operating only in Germany and companies that also have permanent 
establishments in other Member States. 
37 The referring court cites the following judgment of the Court of Justice in that 
respect: 
– of 21 February 2013, A (C-123/11, EU:C:2013:84). 
38 However, the question arises as to whether the obligation to take account of cross-
border losses is not limited as to amount by the amounts of losses which the 
company could have calculated in the State in which the permanent establishment 
is situated were the taking account of losses not precluded there. 
39 The reason for this is that, had it been possible to take account of the losses in the 
State in which the permanent establishment is situated, the State in which the 
parent establishment is resident would not have been obliged, on the grounds of 
equal treatment, to allow a deduction of losses in respect of the difference from 
the (higher) loss amount resulting from its own rules for calculating profits. 
40 It is questionable whether freedom of establishment requires the State in which the 
parent establishment is resident, where there are final losses, to place the company 
in a better position than it would have otherwise have been in if the losses could 
have been claimed in the State in which the permanent establishment is situated. 
41 In the situation where the losses to be taken into account are limited by the 
amount of losses resulting under the [UK] rules for calculating profits, the dispute 
would have to be referred back to the Finanzgericht, so that it may rule on the 
determination of the calculation of profits required under [UK] tax law.