1. 7. 85 Official Journal of the European Communities No C 160/35 
Opinion on the proposal for a Council Directive on the harmonization of the laws of the Member 
States relating to tax arrangements for the carry-over of losses of undertakings (J) 
(85/C 160/10) 
On 24 September 1984, the Council decided to consult the Economic and Social Committee, under 
Article 100 of the Treaty establishing the European Economic Community, on the abovementioned 
proposal. 
The Section for Economic and Financial Questions, which was responsible for preparing the 
Committee's work on the subject, was unable to produce an opinion within the deadline set, on 
account of the problems that arose.bd 
The Committee decided to appoint Mr Goris rapporteur-general with the task of preparing its work 
on this subject. 
At its 225th plenary session (meeting of 27 March 1985), the Economic and Social Committee 
adopted the following opinion by a majority in favour, with two votes against and one 
abstention: 
1. Introduction 
The Commission proposal is in keeping with the objectives of 
the Community, one of whose fundamental aims is 
harmonization of taxes on the profits of undertakings. This is 
the only way in which excessive divergence of external cost 
factors, such as taxes, within the Community can be 
prevented, with a view to optimizing competition between 
undertakings in different Member States. The proposal is an 
appropriate step (albeit a small one) in the direction of 
further harmonization of taxes in the Member States. 
The proposal also has specific importance in the present 
economic situation in the Community. Large sectors of 
European trade and industry are at present in the throes of 
painful economic adjustments. As flexible as possible fiscal 
support should be given to this reorientation. 
The proposal will help to improve the tax environment for 
undertakings and will thereby have a beneficial effect on the 
profitability and financial situation of trade and industry in 
the Community, so that its competitiveness at world level 
will be enhanced. The Commission proposal is also to be 
welcomed because many firms with good viability are not at 
present able to set off their tax-deductible losses within the 
periods or in the ways laid down by law in some Member 
States. 
The Commission wishes the Directive to come into force on 
1 January 1986. This will be feasible only if the arrangements 
are simple and confined to essentials. The proposal should be 
appraised also from this angle. In the light of the above, the 
Committee endorses the Commission proposal, subject to 
the following comments and proposals. 
2. General 
It is necessary to be able to carry over losses in the case of 
taxes that are always levied on net earnings in a particular 
H OJ No C 253, 30. 9. 1984, p. 5. period. The period in question is generally the financial year 
or the calendar year. First of all, earnings and costs over the 
year itself are netted out. Since this annual profit concept has 
arbitrary features - it is not good business practice to 
invariably allocate all earnings and costs to one particular 
year - the point of departure for tax purposes is the total 
profit concept. This means that the total profit made by a 
firm during its existence is taken into account for tax 
assessment - nothing more and nothing less. The total profit 
in this context is the sum of the annual profits. This point of 
departure implies that ideally losses do not 'evaporate' 
because of too short periods for setting-off. A firm must be 
able to set off the losses over a particular period against the 
profits made in other periods. This is the 'vertical' setting-off 
of losses. 
The Commission proposal does not distinguish between 
sources of losses (Article 2). This 'horizontal' setting-off of 
losses - the netting-out of profit and other income, for 
example earned income - is not covered by the 
harmonization and therefore remains a matter for national 
legislation. This means also that supervision to prevent abuse 
is national in character, as is expressly indicated in Article 4. 
The national legislature remains also the competent 
authority for questions such as the international horizontal 
setting-off of losses. The Committee would urge that this 
setting-off of losses within the Community be regulated as 
soon as possible at Community level. This would promote 
the internationalization of trade and industry in the EEC. 
The situation regarding foreign holdings indeed varies 
greatly. In this connection the Commission points to the 
difference between the taxation of permanent establishments 
and the taxation of subsidiaries. The Committee notes that 
the Commission does not define these terms and does not 
indicate the fiscal/legal consequences of this difference. This 
situation can lead to confusion. In some Member States the 
term 'permanent establishment' is used only where the 
establishment forms a base for taxable transactions. The 
Commission proposal provides for uniformity in the 
arrangements for the setting-off of losses in the legislation of 
the Member States, including between the various taxes in a 
Member State as listed in Article 1 (2). This is only right, 
No C 160/36 Official Journal of the European Communities 1. 7. 85 
since the arrangements for the setting-off of losses should not 
play a role in the choice of legal form. 
The Committee considers that, pending further 
harmonization, for example regarding transfer pricing, 
technical problems connected with the setting-off of losses 
should be solved in the national legislation. The Commission 
should, however, adopt as soon as possible measures 
designed to bring about further harmonization, for example 
in respect of transfer pricing. A solution will also have to be 
found in national legislation for the differences in the 
consequences of the setting-off of losses as a result of the fact 
that some taxes are progressive while others are 
proportional. A general disadvantage of the carry-over of 
losses is that tax is refunded in a currency that has meanwhile 
lost value through inflation. 
The Commission proposes limiting the period for the 
carry-back of losses to two years. Where it already exists in 
the Member States, carry-back is subject to a certain time 
limit. The Committee thinks that the carry-back time limit 
should be three years, as it already is in some Member States. 
The serious budgetary repercussions which this may have in 
certain Member States could be offset by allowing these 
countries to phase in the time limit. The Committee considers 
unlimited carry-forward for all losses to be unacceptable. It 
proposes that carry-forward be limited to eight years -
which is the rule in most Member States. However, it should 
be possible for the start-up losses of new firms (during the 
first five years) to be carried forward without restriction. 
3. Comments on the individual Articles 
Article 1 
The Committee considers it right that provision is made for 
excluding (very) small firms from the field of application of 
the Directive. Otherwise these firms would be forced to 
operate an accounting system that would be inconsistent 
with their size and importance. 
Done at Brussels, 27 March 1985. Article 2 
The Committee considers that the proposed exclusion of the 
results of foreign establishments or subsidiaries should be 
reviewed with the aim of enabling the expected benefits of the 
Directive to be obtained in full. 
The fact that no distinction is made according to the 
horizontal national source of the losses and be accepted 
on grounds of simplicity (see the relevant passage in the 
general section (2) but without prejudice to the provisions of 
Article 4. 
Article 3 (1) 
Carry-forward of losses should be limited to eight years. 
Article 3 (2) 
It is right that, if the shareholder receives a tax credit where 
corporation tax is levied, the carry-back refund should be 
reduced by the amount of that tax credit. 
Article 3 (3) 
This harmonization proposal will ultimately have an impact 
on the differences existing at national level between the rates 
of the various taxes and components thereof. Given the main 
aim of the Directive, viz. harmonization of the taxes on trade 
and industry in the Community, a positive view can be taken 
of this proposal. 
Article S 
The Committee supports the ambitious date for 
implementation and urges that the proposal be adopted 
swiftly by the Council. 
The Chairman 
of the Economic and Social Committee 
Gerd MUHR