6. 5. 91 Official Journal of the European Communities No C 120/41 
Opinion on the proposal for a Council Directive concerning arrangements for the taking into 
account by enterprises of the losses of their permanent establishments and subsidiaries 
situated in other Member States {l) 
(91/C 120/12) 
On 5 February 1991 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, Financial and Monetary Questions, which was responsible for 
preparing the Committee's work on the subject, adopted its Opinion on 12 March 1991. The 
Rapporteur was Mr R. Pelletier. 
At its 285th plenary session (meeting of 20 march 1991) the Economic and Social Committee 
adopted the following Opinion unanimously. 
Preliminary comment 
The Committee notes that the proposal falls within the 
framework of the Commission Communication to the 
Parliament and the Council, dated 20 April 1990 (Doc. 
SEC(90) 601 final). 
The Committee would like to be kept informed of the 
conclusions of the study carried out by the Commission 
on the company taxation problems caused by more 
advanced economic integration. 
In the meantime, the Committee reserves the right to 
draw up an additional Opinion on the communication 
of 20 April 1990. 
Introduction 
The Committee welcomes the Commission proposal, 
since it makes a key contribution to the completion of 
the Single Market. It is clear that European companies 
should not be taxed on results which are fully or partly 
theoretical—as would be the case if losses incurred by 
their operations within the Community could not be 
deducted from overall profits. 
In the interests of fiscal neutrality, it is also essential to 
ensure that losses may be dealt with under comparable 
conditions, irrespective of whether the operation takes 
the form of a permanent establishment or a subsidiary. 
1. General comments The first method (imputation) enables losses to be 
taken into account indirectly, but at the same time 
has a much broader aim: the institution of a global 
system, the positive or negative results of all perma­
nent establishments located in a Member State being 
included in the taxable result in the country of the 
head office. Tax paid locally on positive results in 
a given country is credited to any tax due on the 
same results in the country where the head office is 
situated. 
Although the text does not say so specifically, the 
logic of the imputation system points to reconsti-
tution of results of permanent establishments in 
other countries under the tax assessment rules of 
the country in which the head office is located. 
It should be noted that if a Member State adopts 
the imputation system, it becomes compulsory for 
companies in that country. 
The second method (deduction of losses with rein­
corporation of subsequent profits) is less ambitious 
in scope: it proposes to deduct losses incurred by 
permanent establishments in other Member States 
from the taxable result in the home country— 
subsequent profits from the same source being 
included in the taxable result of the country of the 
head office, to the extent of the amounts originally 
deducted. 
1.1. Summary description of the arrangements con­
sidered 
a) Permanent establishments 
The draft Directive gives Member States the choice 
between two methods for taking account of losses: 
OJ No C 53, 28. 2. 1991, pp. 30. The results of permanent establishments are calcu­
lated in accordance with the assessment rules appli­
cable in the country where they are operating. 
Member States may arrange for losses not automati­
cally reincorporated to be compulsorily reincorpor­
ated after a five-year period or if the permanent 
establishment is sold, wound up or transformed into 
a subsidiary. 
No C 120/42 Official Journal of the European Communities 6. 5. 91 
Where adopted by Member States, this method 
(deduction of losses with reincorporation of sub­
sequent profits) remains optional for companies. 
b) Subsidiaries 
Only the reincorporation method may apply to this 
type of operation, local results being taken into account 
in proportion to the percentage of the parent company 
holding in the subsidiary. 
At least 75% of the subsidiary must be owned by the 
parent company, together with a majority of voting 
rights, in order for this system, which is optional for 
companies, to apply. Member States may arrange for 
a lower minimum holding. 
Where a company decides to apply this system to its 
subsidiaries operating in other Member States, it may 
not take value adjustments relating to its holding in 
those subsidiaries into account for tax purposes. 
It is specifically stated that the Directive does not pre­
vent Member States maintaining or introducing other 
methods—such as consolidation—for offsetting the 
losses incurred by the subsidiaries operating abroad, 
owned by companies in their territory. 
1.2. Evaluation 
1.2.1. Reference to results for tax pur­
poses 
The Commission considers that the temporary charac­
ter of the deduction made under the deduction/reincor-
poration method justifies taking into account the results 
for tax purposes determined in accordance with the 
rules of the country in which they are obtained; it 
suggests that this allows a degree of flexibility in the 
choice of tax legislation applicable. 
Such flexibility does not, however, prevent difficulties 
arising from the different tax-assessment rules in the 
various Member States: the actual economic benefit 
generated by the temporary deduction of losses depends 
on the legislation applying in each country. The possi­
bility of distorting competition therefore arises, since 
the country in which the head office is situated may finally have to bear the consequences of advantageous 
tax assessment rules adopted in another Member State 
in order to attract companies to set up on its territory. 
Moreover, verification by the State in which the head 
office is located of the proper application of tax rules 
in the country in which the results are obtained is 
contingent on the existence of effective arrangements 
for mutual assistance between the authorities of the 
various Member States—this has not yet been achieved. 
There is therefore a risk of most Member States apply­
ing a system of accounting for losses determined in 
accordance with the tax rules applicable in the country 
of the head office; despite its apparent logic, the general 
introduction of such an approach would be too com­
plex. 
Member State companies which did not acknowledge 
the tendency towards the globalization of results would 
not necessarily possess the means to implement the 
evaluation method involved. 
If this risk were to arise the principle set out in the 
draft Directive would no longer be justified: it would 
be preferable to seek the agreement of a majority of 
Member States to replace it with the principle of tem­
porary taking into account of book losses. In addition 
to its simplicity, this approach would be both consistent 
and conducive to neutrality: 
— Consistent, in that harmonization of accounting 
rules in determining results has practically been 
achieved throughout the Community for most busi­
nesses, both for individual company and consoli­
dated results. It is worth noting in this respect that 
the tax authorities in the Member States of the head 
offices would thereby be in a position to verify the 
proper application of these harmonized accounting 
principles for the determination of the results of 
operations abroad. 
— Conducive to neutrality, since taking book losses 
into account is one of the factors used in assessing 
value adjustments for holdings, a practice generally 
allowed under the tax legislation of all Member 
States. 
Furthermore, such an approach could be brought into 
line with the machinery for taking account of the losses 
incurred by subsidiaries established in the same country 
as the head office: in fact, this is usually accomplished 
indirectly via value adjustments. 
6. 5. 91 Official Journal of the European Communities No C 120/43 
1.2.2. Effects of the sale or winding up 
of the operation 
The sale or winding up of permanent establishments or 
subsidiaries may involve a capital loss for the company 
located in the country of the head office. Along with 
the reincorporation of initially deducted losses, capital 
losses should always be taken into account in the Mem­
ber State where the head office of the company is 
situated, irrespective of whether the operation takes the 
form of a subsidiary or a permanent establishment. 
1.2.3. Scope of the measure 
The scope of the Directive seems inadequate; it should 
be possible to take account of all the losses of a group, 
irrespective of where they are uncurred. 
This should apply in particular to: 
— losses incurred by permanent establishments located 
in a Member State belonging to 75% subsidiary 
holdings in non-Member States, 
— losses incurred by sub-holdings in a Member State, 
75% of which are owned by a 75% subsidiary 
Done at Brussels, 20 March 1991. holding located in a non-Member State, on con­
dition that measures are adopted allowing double 
taking into account of losses to be barred. 
a) in the State where the head office is located; 
b) where the State in which the intermediary sub­
sidiary is located, takes such losses into account. 
The proposed scheme should therefore be seen as the 
first stage of broader arrangements for taking account 
of losses, the only way of enabling powerful European 
groups to develop, in a better position to scope with 
international competition. 
2. Comments on specific Articles 
2.1. Article 8 
Add a new paragraph (c) worded as follows: 
'c) Capital losses arising from the sale or winding 
up of a permanent establishment shall be deducted 
from the taxable results of the enterprise when they 
cannot be deducted from the taxable results of the 
permanent establishment.' 
The Chairman 
of the Economic and Social Committee 
Francois STAEDELIN