Case C-157/07

Finanzamt für Körperschaften III in Berlin

v

Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH

(Reference for a preliminary ruling from the Bundesfinanzhof)

(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)

Summary of the Judgment

1. International agreements – European Economic Area Agreement – Freedom of establishment – Provisions of the Treaty – Scope

(Art. 43 EC; EEA Agreement, Art. 31)

2. International agreements – European Economic Area Agreement – Freedom of establishment – Tax legislation – Corporation tax

(EEA Agreement, Art. 31)

1. The provisions of the Treaty concerning freedom of establishment 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; all measures which prohibit or impede the exercise of that freedom, or render it less attractive, must be regarded as such restrictions. Those considerations apply where a company established in a Member State carries on business in another Member State through a permanent establishment.

(see paras 29-31)

2. Article 31 of the Agreement on the European Economic Area (EEA) does not preclude 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.

Such a tax system does constitute a restriction on the right set out in Article 31 of the EEA Agreement where the tax situation of a company which has its registered office in one Member State and has a permanent establishment in another Member State is less favourable than it would be if the latter were to be established in the first Member State. Where all the losses incurred by the permanent establishment in another Member State are, initially, deducted from the profits made by the principal company in the context of that company’s taxation in the first Member State, and, by so doing, that State grants a tax advantage in the same way as if that permanent establishment were situated in national territory, by subsequently proceeding to reintegrate losses by the said permanent establishment into the basis of assessment of the principal company when the latter has made profits, the national tax system withdraws the benefit of that tax advantage, thereby subjecting resident companies with permanent establishments in another Member State to less favourable treatment than that enjoyed by resident companies with permanent establishments situated in national territory. By reason of that difference in tax treatment, a resident company could be discouraged from carrying on its business through a permanent establishment situated in another Member State.

However, such a restriction is justified by the need to guarantee the coherence of the tax system. In that respect, the reintegration of losses provided for by the tax system at issue 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, reflects a logical symmetry. There is thus a direct, personal and material link between the two elements of the tax mechanism at issue, the said reintegration being the logical complement of the deduction previously granted. Moreover, that restriction is appropriate to achieve such an objective, in that it operates in a perfectly symmetrical manner, only deducted losses being reintegrated. Furthermore, 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 of the said tax system and the tax legislation of the State in which the permanent establishment is situated. 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. 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. 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, the said restriction arising not from the tax system at issue, but from the allocation of tax competences under the double taxation convention concluded between the two States concerned.

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 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. 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.

(see paras 34-39, 42-46, 48-49, 51-55, operative part)

JUDGMENT OF THE COURT (Fourth Chamber)

23 October 2008 ( )

(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)

In Case C‑157/07,

REFERENCE for a preliminary ruling under Article 234 EC from the Bundesfinanzhof (Germany), made by decision of 29 November 2006, received at the Court on 21 March 2007, in the proceedings

Finanzamt für Körperschaften III in Berlin

v

Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH,

THE COURT (Fourth Chamber),

composed of K. Lenaerts, President of the Chamber, R. Silva de Lapuerta (Rapporteur), E. Juhász, G. Arestis and J. Malenovský, Judges,

Advocate General: E. Sharpston,

Registrar: B. Fülöp, Administrator,

having regard to the written procedure and further to the hearing on 10 July 2008,

after considering the observations submitted on behalf of:

– the Finanzamt für Körperschaften III in Berlin, by J.-P. Panthen and P. Lamprecht, acting as Agents,

– Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH, by J. Schönfeld, Rechtsanwalt,

– the German Government, by M. Lumma and C. Blaschke, acting as Agents,

– the Belgian Government, by A. Hubert, acting as Agent,

– the Netherlands Government, by C. Wissels and C. ten Dam, acting as Agents,

– the United Kingdom Government, by Z. Bryanston-Cross, acting as Agent, assisted by R. Hill, Barrister,

– the Commission of the European Communities, by R. Lyal and W. Mölls, acting as Agents,

having decided, after hearing the Advocate General, to proceed to judgment without an Opinion,

gives the following

Judgment

1 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’).

2 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

3 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.’

4 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.’

…’

5 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.’

6 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.

...’

7 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.’

8 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

9 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.’

10 From 1990 onwards, the rules on the right to deduct were set out in Article 2a(3) of the EStG.

Austrian law

11 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.

12 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

13 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.

14 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.

15 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.

16 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.

17 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.

18 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.

19 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.

20 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.

21 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.

22 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

23 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.

24 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).

25 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.

26 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

27 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.

28 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; KellerHolding, paragraph 29).

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).

30 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).

31 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).

32 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.

33 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.

34 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.

35 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.

36 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.

37 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.

38 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).

39 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

40 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).

41 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.

42 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.

43 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.

44 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.

45 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.

46 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.

47 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.

48 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).

49 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).

50 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).

51 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.

52 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.

53 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.

54 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.

55 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

56 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]