Judgment;Summary — ECLI:EU:C:2022:792
Date: 2022-10-13
Language of the case: German
Court formation: Ninth Chamber
Subject matter: Right of establishment
Procedure: Reference for a preliminary ruling
Origin: Germany

Summary C-431/21 – 1 
Case C-431/21 
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: 
15 July 2021 
Referring court: 
Finanzgericht Bremen (Germany) 
Date of the decision to refer: 
7 July 2021 
Applicant: 
X GmbH & Co. KG 
Defendant: 
Finanzamt Bremen 
  
Subject matter of the main proceedings 
Tax law – Transactions with a foreign element – Obligation to keep records on the 
nature and content of business relations with related parties – Arm’s length 
principle – Sanctions in the event that such records are not submitted or are 
unusable 
Subject matter and legal basis of the request 
Interpretation of EU law, Article 267 TFEU 
Question referred for a preliminary ruling 
Must Article 43 of the EC Treaty and Article 49 TFEU, which guarantee the 
freedom of establishment (or, respectively, Article 49 of the EC Treaty and 
Article 56 TFEU, which guarantee the freedom to provide services), be interpreted 
as precluding national legislation under which, in situations involving transactions 
with a foreign element, the taxpayer must keep records on the nature and content 
EN 
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of his or her business relations with related parties, including the economic and 
legal bases for an arm’s length agreement on prices and other terms and 
conditions with the related parties, and under which, where the taxpayer fails to 
submit those records when requested to do so by the tax authority, or where the 
records submitted are fundamentally unusable, not only is there a rebuttable 
presumption that his or her income subject to tax domestically, which such 
records serve to determine, is higher than the income that he or she has declared, 
and, if in such cases the tax authority is required to make an estimate and such 
income can be determined only within a certain range, in particular only on the 
basis of price bands, the upper value of that range may be taken as the basis to the 
detriment of the taxpayer, but, in addition, a surcharge is to be imposed which is at 
least 5 per cent and at most 10 per cent of the excess income determined, but not 
less than EUR 5 000, and which, in the event that usable records are submitted 
late, is up to EUR 1 000 000, but not less than EUR 100 for each full day of delay, 
whereby the imposition of a surcharge is to be waived only if the non-compliance 
with the record-keeping obligations appears to be excusable or if any fault 
involved is only minor? 
Provisions of European Union law relied on 
Articles 49 and 56 TFEU 
Provisions of national law relied on 
Paragraph 90(3) of the Abgabenordnung (German Tax Code; ‘the AO’) in the 
version of 29 July 2009. That provision provides, inter alia, that, in situations 
involving transactions with a foreign element, a taxpayer must keep records on the 
nature and content of his or her business relations with related parties within the 
meaning of Paragraph 1(2) of the Außensteuergesetz (Law on foreign transaction 
tax; ‘the AStG’). The obligation to keep records also includes the economic and 
legal bases for an arm’s length agreement on prices and other terms and 
conditions with the related parties. 
Paragraph 162(3) of the AO in the version of 14 August 2007. That provision 
reads, inter alia: ‘If a taxpayer infringes his or her obligations to cooperate under 
Paragraph 90(3) by failing to submit records, or if records submitted are 
fundamentally unusable, or if it is established that the taxpayer has not kept 
records within the meaning of the third sentence of Paragraph 90(3) in a timely 
manner, there shall be a rebuttable presumption that his or her income subject to 
tax domestically, which the records within the meaning of Paragraph 90(3) serve 
to determine, is higher than the income that he or she has declared. If, in such 
cases, the tax authority is required to make an estimate and such income can be 
determined only within a certain range, in particular only on the basis of price 
bands, the upper value of that range may be taken as the basis to the detriment of 
the taxpayer.’ 
FINANZAMT BREMEN 
 
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Paragraph 162(4) of the AO in the version of 13 December 2006. According to 
that provision, the tax authority may impose, inter alia, a surcharge of EUR 5 000 
if a taxpayer fails to submit records within the meaning of Paragraph 90(3) or if 
the records submitted are fundamentally unusable. 
Paragraph 1(2) of the AStG in the version of 14 August 2007. That provision 
reads as follows: ‘A party is related to a taxpayer if: 
1. the party has a direct or indirect shareholding in that taxpayer of at least 25% 
(substantial shareholding) or can exercise direct or indirect influence over the 
taxpayer or, conversely, where the taxpayer has a substantial shareholding in that 
party or can exercise direct or indirect influence over that party; or 
2. a third party has a substantial shareholding in that party or taxpayer, or can 
exercise direct or indirect influence over the party or the taxpayer; or 
3. the party or the taxpayer is in a position, when agreeing the terms of a 
business relationship, to exercise an influence on the other which has its source 
outside that business relationship, or if one of those parties has a particular interest 
in the other’s generation of income.’ 
Succinct presentation of the facts and procedure in the main proceedings 
1 The applicant is a limited partnership (KG) having its registered office in 
Germany. Its commercial purpose was the holding and management of 
participations, in particular of undertakings resident in Germany, as well as the 
provision of services to affiliated undertakings and third parties. It held 100% of 
the shares in a subsidiary limited liability company (GmbH) having its registered 
office in Germany, which, in turn, held 100% of the shares in four other limited 
liability companies having their registered offices in Germany (controlled 
companies). 
2 The applicant’s general partner, which was authorised to represent it, was a 
limited liability company which also had its registered office in Germany. The 
applicant’s sole limited partner was a company (B.V.) having its registered office 
in the Netherlands. Its sole shareholder was Y N.V., which also had its registered 
office in the Netherlands. Y N.V. therefore indirectly held 100% of the shares in 
the applicant through its shareholding in the applicant’s limited partner. In 2013, 
the limited liability company (GmbH) which was the applicant’s general partner 
was merged with the applicant. 
3 Y N.V. provided services to the applicant on the basis of a business management 
contract. Various persons, who worked as managing directors or in other positions 
at Y N.V. or in other companies of the group, were engaged to that end. 
4 In accordance with the business management contract, the remuneration was to be 
based on the costs and expenses actually incurred. Those were to include direct 
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and indirect costs. In particular, wage costs incurred were to be reimbursed. By 
contrast, costs incurred for activities in the interests of the shareholders of Y N.V. 
(shareholderʼs costs) were not to be billed. Y N.V. was obliged to record and 
document in full the reimbursable costs and expenses. After the end of the 
calendar year, Y N.V. was to establish a final account, which was to be 
sufficiently detailed to enable the applicant to charge the costs in question in turn 
to the controlled companies. However, Y N.V. did not provide the applicant with 
detailed annual accounts on the services provided and the costs incurred. 
5 On the basis of a tax audit notice of 17 January 2012, an audit was conducted at 
the applicant in respect of the years 2007 to 2010. The subject of the audit was, in 
particular, the management fees paid by the applicant to Y N.V. At the beginning 
of the audit, the applicant was informed that the focus of the audit was, inter alia, 
the transfer prices and the documentation pertaining to the foreign element. 
6 In the course of the audit, the applicant submitted various documents to 
substantiate the chargeable costs incurred by the applicant on the basis of the 
business management on the part of Y N.V. Documents were requested on several 
occasions in the context of the audit. The subject of the inquiries made in respect 
of the audit and the documents submitted by the applicant were, in particular, the 
possible double counting of individual cost items, the inclusion of shareholderʼs 
costs and the determination of the staff costs taken into account. With regard to 
the staff costs, the audit questioned in particular the number of hours worked, the 
determination of the hourly rates and the appropriateness of the hourly rates. The 
audit criticised the applicant’s lack of arm’s length documentation 
(Angemessenheitsdokumentation) on several occasions. In its view, such 
documentation is a necessary part of the documentation under Paragraph 90(3) of 
the AO. 
7 On 17 March 2016, the applicant and the defendant, with the participation of Y 
N.V., entered into an agreement on the facts in respect of the audit period, by 
which they agreed that the management fee amounts recorded by the applicant as 
operating expenses in the years 2007-2010, in the amount of EUR 400 000.00 per 
year (EUR 1.6 million in total), would be regarded as not being appropriate. 
8 In the audit report of 10 June 2016, it was stated that the factual documentation 
(Sachverhaltsdokumentationen) and arm’s length documentation submitted by the 
applicant did not allow the facts to be sufficiently clarified. The report stated that 
that was why the agreement on the facts had been concluded. It also stated that the 
documentation submitted was not usable. In accordance with Paragraph 162(3) 
and (4) of the AO, a surcharge of at least 5% of the excess income per year is to 
be imposed, that is to say EUR 20 000.00 per year. Consequently, by notice of 
8 November 2016, the defendant imposed on the applicant, in accordance with 
Paragraph 162(4) of the AO, a surcharge of EUR 20 000 for each of the tax 
assessment periods 2007, 2008, 2009 and 2010, in the amount of EUR 80 000. 
FINANZAMT BREMEN 
 
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9 The applicant filed an objection to the imposition of that surcharge; it was 
dismissed as unfounded. The applicant then brought an action before the referring 
court. 
The essential arguments of the parties in the main proceedings 
10 The applicant considers that the records submitted met the statutory requirements. 
It submits that the defendant imposes excessive demands on the requirements for 
the records to be submitted. According to the applicant, the records can be 
regarded as being fundamentally unusable only if the deficiencies are of such 
seriousness that the submission of the deficient records is tantamount to a 
complete failure to submit records. However, the defendant carried out an 
intensive examination of the records submitted by the applicant, a circumstance 
which militates in favour of the records being usable. 
11 In its view, Paragraph 162(4) of the AO in particular infringes EU law because it 
unjustifiably discriminates against cross-border business activities. 
Paragraph 162(4) of the AO applies only to taxpayers who maintain business 
relations with related parties that are based abroad. According to the applicant, 
this restricts the freedom of establishment guaranteed under EU law. Such 
interference cannot be justified. In particular, it is not necessary to impose a tax 
surcharge that is applicable exclusively to cross-border business relations. 
12 The defendant defends the imposition of the surcharge primarily with the 
argument that the records submitted are fundamentally unusable because the 
applicant did not submit any arm’s length documentation demonstrating efforts 
made to reach an arm’s length agreement. In addition, it emerged from 
information communicated by the Dutch tax authority that no records of working 
hours had been kept at Y N.V. for the purposes of billing the applicant. According 
to the defendant, the unusability of the records submitted results directly from 
that. Even if it were assumed that the records submitted were usable, they had in 
any event been submitted late, which can also justify the surcharge. An 
infringement of EU law is not apparent. 
Succinct presentation of the reasoning in the request for a preliminary ruling 
13 The referring court has doubts as to the compatibility of Paragraph 162(4) of the 
AO with Article 49 TFEU and, respectively, Article 56 TFEU. It considers the 
provisions on freedom of establishment to be applicable first and foremost. 
However, should the provisions on the freedom to provide services be applicable, 
the referring court takes the view that the same questions would arise in that 
connection. 
14 Paragraph 90(3) of the AO provides for special record-keeping obligations for 
cross-border business relations with related parties. Paragraph 162(4) of the AO 
prescribes the imposition of a surcharge if the taxpayer does not submit records 
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upon request or submits them late, or if the records submitted are fundamentally 
unusable. 
15 The referring court takes the view that those provisions constitute a restriction of 
the freedom of establishment, because a domestic taxpayer who maintains 
business relations with related parties that are resident in another Member State is 
subject to special record-keeping obligations, and failure to submit the required 
records leads to a sanction in the form of a surcharge, whereas those special 
record-keeping obligations and the imposition of such a surcharge are not 
provided for in respect of taxpayers with business relations with domestic related 
parties. 
16 The requirement of special records and the threat of negative consequences in the 
event of non-compliance with the record-keeping obligation is likely to impede 
the freedom of establishment. This is because persons from other Member States 
might refrain from setting up subsidiaries in Germany or establishing business 
relations with them in order to avoid incurring expenses and costs for keeping 
special records in respect of those subsidiaries and to avoid the risk of surcharges 
being imposed at the expense of the subsidiary in the event of non-compliance 
with the record-keeping obligations (see, in that regard, judgment of 21 January 
2010, SGI, C-311/08, EU:C:2010:26). 
17 The referring court takes the view that, in particular, the objective of preventing 
tax avoidance and the objective of preserving the balanced allocation between the 
Member States of the power to tax enter into consideration as justification for the 
restriction of the freedom of establishment. Combating tax avoidance may justify 
also measures aimed at ensuring the effectiveness of fiscal supervision. 
18 National legislation which seeks to prevent profits generated in the Member State 
concerned from being transferred outside the tax jurisdiction of that Member State 
via transactions that are not in accordance with market conditions, without being 
taxed, is in principle appropriate for ensuring the preservation of the allocation of 
powers of taxation between the Member States (see judgment of 31 May 2018, 
Hornbach-Baumarkt, C-382/16, EU:C:2018:366). 
19 The objective of Paragraphs 90(3) and 162(4) of the AO is to prevent profit 
shifting carried out for reasons pertaining to company law between affiliated 
undertakings, from Germany to other countries. By means of the records to be 
kept pursuant to Paragraph 90(3) of the AO, the tax authorities are to be enabled 
to verify compliance with arm’s length principles and thus the proper allocation of 
profits. The threat of the surcharge is intended to increase the willingness of 
taxpayers to comply with the record-keeping obligations. 
20 The provisions therefore fundamentally serve legitimate purposes. They also 
appear to be appropriate for attaining those objectives. However, the question 
arises as to whether those provisions are necessary to attain the objective pursued. 
The referring court takes the view that, even on the assumption that 
FINANZAMT BREMEN 
 
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Paragraph 90(3) of the AO is to be assessed as being in conformity with EU law 
(as found by the Bundesfinanzhof (Federal Finance Court, Germany) in a decision 
from 2013), it appears doubtful whether Paragraph 162(4) of the AO is compatible 
with EU law from the perspective of necessity, as that provision goes beyond what 
is necessary to achieve the legitimate objective. 
21 It is true that the obligation to keep records under Paragraph 90(3) of the AO 
would be largely devoid of purpose if the legislature did not attach to non-
compliance any negative consequences for the taxpayer. That does not mean, 
however, that any sanctioning of the infringement of the obligation would be 
justified. Referring to the judgment of 21 January 2010 in SGI (C-311/08, 
EU:C:2010:26), the referring court recalls that legislation is necessary for the 
attainment of the pursued objective only if it is limited to the correction of 
arrangements which are inconsistent with the arm’s length principle. 
22 Moreover, it should be noted that, in addition to the provision on the surcharge 
under Paragraph 162(4) of the AO, German law provides for a further sanction in 
Paragraph 162(3) of the AO where the taxpayer infringes his or her obligations to 
cooperate. In accordance with that provision, there is a rebuttable presumption 
that the income subject to tax domestically, which the records within the meaning 
of Paragraph 90(3) of the AO serve to determine, is higher than the income 
declared by the taxpayer. In addition, where the tax authority makes an estimate of 
income that can be determined only within a certain range, in particular only on 
the basis of price bands, it may take the upper value of that range as the basis to 
the detriment of the taxpayer. 
23 That provision already attaches far-reaching tax consequences to the non-
compliance with the record-keeping obligations under Paragraph 90(3) of the AO, 
with the result that it appears to be ensured that any arrangements that do not 
comply with the arm’s length principle are corrected and the taxpayer does not 
derive any tax advantage from infringing the obligation. By contrast, the 
(additional) imposition of a surcharge pursuant to Paragraph 162(4) of the AO 
does not further contribute to ensuring that tax assessment is as correct as possible 
and takes the arm’s length principle into account. Rather, it appears to serve solely 
as a sanction for an infringement of the obligations to cooperate under 
Paragraph 90(3) of the AO. 
24 The doubts as to the necessity of the surcharge provision are reinforced by the 
provisions on the determination of the amount of the surcharge. For instance, the 
amount of the surcharge is linked to the excess income determined and is 
therefore not directly dependent on the actual tax effect of the determinations. 
Furthermore, if the conditions are met, the surcharge is to be set at the amount of 
EUR 5 000 even if excess income ultimately could not be determined. Moreover, 
although the surcharge is limited to a maximum of 10 per cent of the excess 
income determined, no absolute ceiling is set for the surcharge – except in the 
case of late submission of records. 
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25 Since the referring court takes the view that a justification appears doubtful, the 
question set out above is referred to the Court of Justice for a preliminary ruling.