OPINION OF ADVOCATE GENERAL

CAMPOS SÁNCHEZ-BORDONA

delivered on 17 January 2018 ( 1 )

Case C‑650/16

A/S Bevola,

Jens W. Trock ApS

v

Skatteministeriet

(Request for a preliminary ruling

from the Østre Landsret (Eastern Regional Court, Denmark))

(Preliminary-ruling proceedings - Corporation tax - Freedom of establishment - Consolidated groups - Tax legislation permitting a resident company to deduct the losses of resident permanent establishments from its taxable income but excluding that possibility for non-resident permanent establishments, unless the company has opted into the international joint taxation scheme)

1. Twelve years after the judgment in Marks & Spencer, ( 2 ) the Court of Justice is once more called upon to give a decision on a dispute which has arisen in relation to company taxation. In this case, the national court asks the Court whether, ‘in conditions equivalent to those in’ that judgment, Article 49 TFEU precludes a national provision pursuant to which a Danish company may not deduct the losses of a permanent establishment (PE) situated in another Member State, unless it opts into the ‘international joint taxation’ scheme.

2. In my view, the request for a preliminary ruling, expressed in those terms, raises three issues that the Court must settle: (a) whether the so-called ‘Marks & Spencer exception’ should be retained; (b) whether, if that exception is retained, the Court considers it applicable to the losses of PEs and not solely to the losses of subsidiaries; and (c) whether the method provided for in the Danish legislation to enable resident companies to deduct the losses of their non-resident PEs (international joint taxation) is compatible with EU law when those losses are definitive.

I. Danish legal framework. Law on corporation tax

3. According to Paragraph 8(2): ‘Taxable income shall not include income and expenditure relating to a permanent establishment or real property situated in a foreign State, on the Faroe Islands or in Greenland, subject to Paragraph 31A. ...’

4. Under Paragraph 31 (‘national joint taxation’ of the activities of group affiliates in Denmark, including income derived from non-Danish companies’ permanent establishments or real property in Denmark): ‘Group affiliates and associations, etc. …, shall be taxed jointly (national joint taxation). “Group affiliates and associations, etc.” shall be understood to mean companies and associations, etc., which at some point during the fiscal year belong to the same group: see Paragraph 31C. Paragraph 31C(2)-(7) equates real property with permanent establishments. “Ultimate parent company” shall be understood to mean that company which is the parent company without being a subsidiary: see Paragraph 31C. (2) For jointly taxed companies a joint income statement shall be established, consisting in the sum of the taxable income for each individual company covered by the joint taxation, calculated according to the general rules of the tax legislation, with those exceptions applicable to jointly taxed companies. Losses in a permanent establishment may be offset against other companies’ income only if under the rules in the foreign State, on the Faroe Islands or in Greenland, where the company is resident, losses cannot be included in the calculation of the company’s income statement in that foreign State, on the Faroe Islands or in Greenland, where the company is resident, or if international joint taxation has been elected under Paragraph 31A. The joint taxation income shall be calculated after offset has been made for each individual company for losses from earlier income periods that can be carried forward. If the joint taxation income is positive, the profit shall be distributed proportionately between the profit-making companies. If the joint taxation income for a fiscal year is negative, the losses shall be distributed proportionately between the loss-making companies and carried forward in the relevant company for offset the following subsequent fiscal year. Losses in a company relating to joint taxation periods can be offset only against profits in that same company. In carrying forward losses, the oldest losses are offset first. Losses in a company relating to earlier fiscal years can be offset against profits in another company only if the losses occurred in a fiscal year in which the relevant companies were taxed jointly and the joint taxation has not subsequently been interrupted. … (4) In national joint taxation the top parent company taking part in the joint taxation shall be designated as the management company for the purposes of joint taxation. If there is no Danish taxable top parent company, but a number of horizontally linked Danish taxable affiliated companies, one the affiliated companies taking part in the joint taxation shall be designated as the management company. … The management company shall be responsible for payment of the overall income tax. … (5) All companies in the joint taxation shall calculate the taxable income for the same period as the management company, irrespective of the accounting year under company law rules: see Paragraph 10(5). … (7) In the calculation of the taxable income, a jointly taxed company may opt to ignore losses, including losses carried forward from earlier fiscal years. Losses corresponding to the taxable income in a jointly taxed permanent establishment in Denmark or a jointly taxed subsidiary in Denmark may be ignored when the permanent establishment’s or subsidiary’s income is included in the income statement outside Denmark, provided that the relevant State’s relief for the Danish taxation corresponds to the relief method provided for in Paragraph 33 of the Ligningsloven (Tax Assessment Act). The amount ignored shall instead be carried forward to subsequent fiscal years in accordance with the rules in Paragraph 15 of the Tax Assessment Act. If an amount lower than the overall losses is ignored, that amount shall be distributed proportionately to the individual loss-making sources.’

5. Paragraph 31A(1)(1) to (3) (‘international joint taxation’ also covering activities pursued by group affiliates, both Danish and foreign, or their permanent establishments) reads: ‘The ultimate parent company may elect joint taxation for those group affiliates and associations, etc., which are taxed jointly under Paragraph 31; the same shall apply for all non-Danish companies and associations, etc., in the group, in which none of the participants is personally liable for the company’s obligations, and which distributes the profits in proportion to the participants’ subscribed capital (international joint taxation). The election also covers all permanent establishments and real property situated outside Denmark belonging to those jointly taxed Danish and non-Danish companies and associations, etc. The provisions of Paragraph 31 on national joint taxation shall apply mutatis mutandis to international joint taxation, with the additions and exceptions following from (2)-(14). …’

6. Paragraph 31A(3)(3) and (6) provides: ‘An election of international joint taxation shall be binding for the parent company for a period of 10 years, subject to the 6th and 7th sentences. … The ultimate parent company may opt to terminate joint taxation, which will result in full recapture of tax: see the 11th sentence.’

II. Facts of the dispute and the question referred for a preliminary ruling

7. A/S Bevola is a company registered in Denmark that produces production platforms for lorries, trailers and accessory equipment. It is a subsidiary and sub-subsidiary of other companies, Danish as well, controlled by Jens W. Trock ApS, the parent company of the group, which is resident in Denmark too.

8. In the 2009 tax year, A/S Bevola had subsidiaries and PEs in a number of Member States. In particular, it had a PE in Finland.

9. The Finnish PE ceased trading in 2009 and relief could not be claimed in Finland for its losses, amounting to 2.8 million Danish krone (DKK). In those circumstances, A/S Bevola applied to deduct those losses from its taxable income for the purposes of corporation tax in Denmark.

10. On 20 January 2014, the Danish authorities, by final decision of the Landsskatteretten (National Tax Appeals Commission) held that A/S Bevola was not entitled to make that deduction because Paragraph 8(2) of the Law on corporation tax (as amended by Law No 426 of 6 June 2005) did not allow either revenue or expenditure attributable to a PE situated in a foreign country to be included in the tax base, unless the company had opted for the international joint taxation scheme provided for in Paragraph 31A of that law.

11. A/S Bevola and Jens W. Trock ApS (‘Bevola’) appealed against that decision before the Østre Landsret (Eastern Regional Court, Denmark), arguing that deduction would have been permissible if the losses had been incurred by a Danish PE and that that difference in treatment constituted a restriction of the freedom of establishment guaranteed by Article 49 TFEU.

12. Against that background, the referring court has submitted the following question for a preliminary ruling: ‘Does Article 49 TFEU preclude a national taxation scheme such as that at issue in the main proceedings under which it is possible to make deductions for losses in domestic [permanent establishments], whilst it is not possible to make deductions for losses in [permanent establishments] situated in other Member States, including in conditions equivalent to those in the EU Court of Justice’s judgment of 13 December 2005, Marks & Spencer (C‑446/03, ECLI:EU:C:2005:763, paragraphs 55 and 56), unless the group has elected international joint taxation on the terms as set out the main proceedings?’

III. Summary of the parties’ observations

13. For Bevola, national legislation that does not permit losses incurred by a PE established in another Member State to be taken into account in calculating the taxable amount may deter a resident company from creating such a permanent establishment, thereby impeding the freedom of establishment, given that a resident and a non-resident PE are in objectively comparable situations.

14. Bevola further submits that, although the case-law accepts that a restriction of the freedom of establishment may be justified for the purposes of maintaining the coherence of the tax system, it does so on condition that there be a direct link between the tax advantage and the offsetting of a particular expense against that advantage. That link does not exist when, as in this case, the conditions set out in the judgment in Marks & Spencer are satisfied.

15. Nor, in Bevola’s view, can preservation of the balanced allocation of the power to impose taxes be used as justification. It is not enough that national law should grant taxpayers the choice of opting into the international joint taxation system for all companies and PEs in the group for a period of 10 years, for that system establishes excessively disproportionate and restrictive conditions of eligibility for deduction. ( 3 ) It adds, furthermore, that the Court has held that a scheme restricting freedom of establishment is incompatible with EU law, even when its application is optional. ( 4 )

16. After acknowledging that its provisions on tax relief restrict freedom of establishment, the Danish Government maintains that those provisions apply to situations that are not objectively comparable and, furthermore, that they are justified by overriding reasons relating to the public interest.

17. That government observes that, the profits generated by the PE of a Danish company situated in another Member State not being subject to Denmark’s power to impose taxes, a PE of a Danish company situated in Denmark is not in a situation comparable to that of the former PE.

18. It adds that its legislation is justified by the necessity of ensuring the balanced allocation of the power to impose taxes between Member States and by that of safeguarding the coherence of the Danish tax system. According to a logical symmetry, the right of Danish companies to deduct the losses of their PEs in Denmark is an inextricable consequence of the fact that the profits derived from those PEs are subject to Denmark’s taxation powers, unlike in the case of PEs established in another Member State.

19. Moreover, the restriction does not go beyond the objectives pursued. In so far as it provides that a company is entitled to opt into the international joint taxation scheme, the system differs substantially from that examined in the judgment in Marks & Spencer. It is true that the exercise of that choice encompasses, for a period of 10 years, all the companies, associations and other entities in the group resident abroad, in addition to all PEs and real property abroad belonging to tax-integrated Danish or foreign companies. The aim of that provision is to prevent a parent company from ‘cherry picking’ which companies or PEs to include in the group tax relief scheme, which would inevitably lead to the selection of those making a loss and the exclusion of those making a profit. Otherwise, the symmetry between the right to tax profits and the right to deduct losses would be seriously compromised. A less compulsory alternative solution cannot be imagined that would be suitable for preserving the balanced allocation of the power to impose taxes between Denmark and the other Member States. A sufficiently long period of compulsory application is essential for the same reasons.

20. For the Danish Government, international joint taxation is not merely a theoretical formula: that only a few cross-border groups have opted into the scheme can be explained by their not considering it the most tax-beneficial scheme.

21. In the Austrian Government’s submission, when national joint taxation is chosen, neither the profits nor the losses of non-resident PEs are taken into account for the purpose of determining the basis of assessment for the tax in Denmark, which means that the situation of a PE established in Finland is not objectively comparable to that of a PE established in Denmark, whose profits are subject in their entirety to the tax in that country. ( 5 ) In contrast, in the context of ‘international joint taxation’, all subsidiaries and all PEs — both resident and non-resident — are treated in the same way. Accordingly, in neither case is there a difference in treatment between objectively comparable situations.

22. Even if the situations were to be considered to be comparable, the difference in treatment would be justified by its being necessary to guarantee the coherence of the tax system. The object of the Danish legislation is to safeguard the symmetry between the taxation of profits and the deduction of losses, in order to prevent taxpayers being free to choose the Member State in which to declare their profits or losses. In keeping with the case-law of the Court, ( 6 ) that legislation is coherent, for, if the profits of a PE situated in Finland may not be taken into account in Denmark, it is logical that its losses should not be taken into account either.

23. The Austrian Government observes that Danish law permitted the group of companies to which Bevola belongs to include the losses in the calculation of the taxable amount, by opting for international joint taxation. There are, therefore, no definitive losses within the meaning of the Marks & Spencer exception, with the result that the Danish legislation is proportionate.

24. As regards the ‘Marks & Spencer exception’, the Italian Government argues that this applies only when all opportunities of declaring the losses have been exhausted, which is not the case here. Bevola may deduct the losses of its PE in Finland by including them in the basis of assessment of the group’s parent company, using international joint taxation. For this reason, the Italian Government contends that the legislation at issue does not restrict freedom of establishment. Bevola’s claim regarding the partial application of the international joint taxation scheme only to the losses, without opting into that scheme, oversteps the bounds of the protection of freedom of establishment and jeopardises the coherence of the taxation of international groups.

25. The German Government argued at the hearing that the situations of resident and non-resident PEs were not comparable, relying on the judgments in Nordea Bank Danmark ( 7 ) and Timac Agro Deutschland. ( 8 )

26. The Commission stresses that, in accordance with the Court’s settled case-law, ( 9 ) the situation of a resident company with a PE in another Member State is comparable to that of a resident company with a PE in the same Member State. However, the Court recently took a different approach in the judgments in Nordea Bank Danmark ( 10 ) and Timac Agro Deutschland, ( 11 ) based on the difference in treatment.

27. However, in the Commission’s submission, examination of the difference in treatment is relevant when it must be established whether the restriction is justified. Otherwise, it would be concluded that two situations have to be regarded as different because the Member State has decided to treat them differently. In the two situations compared in this case, the companies are seeking to benefit from the deduction of losses incurred by their PEs, with the result that the situations are comparable.

28. If the difference in treatment were to be held to be justified for overriding reasons relating to the public interest, it will still be necessary to examine whether it goes beyond what is necessary to attain the aims pursued. The Court stated in the judgment in Marks & Spencer that exclusion of the deduction of the losses of a non-resident subsidiary which has exhausted the possibilities of deduction in its State of residence is disproportionate, case-law which may be extended to non-resident PEs of resident companies, in accordance with the judgment in Lidl Belgium. ( 12 ) If the losses of Bevola’s Finnish PE are genuinely definitive, which it is for the national court to establish, the Danish tax authorities are obliged to allow their deduction.

29. That obligation is not diminished by the existence of the international joint taxation scheme, since that option (by means of which the total revenue of the whole group is subject to Danish tax) has been classified as unrealistic for international groups by the national legislature itself.

IV. Proceedings before the Court of Justice

30. The order for reference was received at the Registry of the Court on 19 December 2016.

31. Written observations were lodged by Bevola, the Austrian, Italian and Danish Governments, and the European Commission; those parties appeared at the hearing held on 25 October 2017, at which the German Government also participated.

V. Assessment

32. The referring court considers it established that the facts on which it must give judgment are similar in nature to those in Marks & Spencer and that the judgment of the Court in that case could be applicable to them. The referring court’s uncertainties relate instead to the compatibility of the national provisions with that case-law.

33. That assertion is essential in order to proceed on the basis of a proposition debated at the hearing. In the Danish Government’s submission, it is not clear that the losses of Bevola’s PE in Finland can be classified as definitive within the meaning of paragraph 55 of the judgment in Marks & Spencer. ( 13 ) It is, at all events, for the referring court to resolve that question, for it alone has at its disposal the relevant evidence for determining whether there ‘has in fact [been] adduced proof of the definitive nature of the losses concerned’. ( 14 ) If, ultimately, the losses are not definitive, the reference for a preliminary ruling will be merely hypothetical and, therefore, inadmissible.

34. At the risk of repeating ideas well known to those who specialise in corporation tax law, the Court examined, in the judgment in Marks & Spencer, the compatibility with EU law of legislation pursuant to which a parent company resident in the United Kingdom could not deduct the (definitive) losses of its non-resident subsidiaries, situated in Belgium, France and Germany. That deduction was, however, permitted as part of group tax relief when the losses were those of a subsidiary resident in the United Kingdom.

35. At that time, the Court laid down a general rule and an exception. The rule is that provisions of that kind ( 15 )‘pursue legitimate objectives which are compatible with the Treaty and constitute overriding reasons in the public interest and that they are apt to ensure the attainment of those objectives’. ( 16 ) The exception, inspired by the principle of proportionality, is, in short, that a parent company may deduct those losses when they are definitive; in other words, when the company has exhausted all the possibilities for deducting those losses afforded to it by national law (the law of the subsidiary’s State of residence). ( 17 )

36. The so-called ‘Marks & Spencer exception’ has led to an almost endless controversy ( 18 ) and has been put to the test on several occasions. Although the Court has limited the scope of the exception in later judgments, ( 19 ) it has retained it, come what may, as the judgment (of the Grand Chamber) of 3 February 2015 confirms. ( 20 )

37. In my view, not only is that approach of the Court consistent with the criterion of stare decisis [the doctrine of precedent], but it also observes a sound principle of tax justice, which creates a link between the levying of tax and taxpaying capacity. ( 21 ) If tax is levied on the profits of a legal person in a particular tax year, it is logical that, when those profits are calculated, losses incurred by that person should not be excluded, for there will have been a commensurate reduction in the taxpayer’s economic capacity (more specifically, taxpaying capacity).

38. When, in a cross-border context, all the possibilities have been exhausted of taking those losses into account in the State of the subsidiary, that does not mean that the parent company’s economic capacity is unaffected: it will definitely have been reduced. That is why the principle underlying the judgment in Marks & Spencer (it must be possible for account to be taken of definitive losses somewhere) ensures that there is a balance between the tax burden and the actual economic capacity of the taxpayer who has incurred those losses.

39. It appears to me, therefore, that the referring court took the correct approach in presuming that the Marks & Spencer exception is a valid starting point for assessing whether Danish law is compatible with EU law.

40. There are two particular circumstances in this case that were not analysed in the judgment in Marks & Spencer. First, the losses which it is sought to deduct in Denmark do not come from a subsidiary but from a non-resident PE in Denmark. Second, the Danish tax system does not absolutely preclude the deduction of those losses, and allows it if a resident company opts for the international joint taxation scheme. The two issues call for separate analysis.

A. The placing on an equal footing of non-resident subsidiaries and PEs and of resident and non-resident PEs for the purposes of the Marks & Spencer exception

41. The essential difference between a subsidiary and a PE is that the former has legal personality while the latter does not. A PE is simply an instrument integrated into the structure of the company which creates and uses the PE for its activities in various forms (agencies, branches and so on). A company can open a PE is its own State of residence or in another Member State and its freedom to choose either option must not be restricted, in principle, by tax measures either (Article 49 TFEU).

42. For tax purposes the fact that a PE and the company creating it are established in the same Member State eliminates any problems regarding the scope of that (single) State’s power to tax their profits. From a purely national perspective, a PE is included in the assets of the legal person using the PE to pursue its activities. For tax purposes, a PE’s losses or gains are usually imputed directly and immediately to the profits of the company which owns it, in the State of residence.

43. That is not the case, however, when a PE is situated in a State other than that of the company that created it. In that situation, a PE may be treated as a separate tax entity, in accordance with the international legal practice reflected in the model tax convention drawn up by the Organisation for Economic Cooperation and Development (OECD), in particular Articles 5 and 7 thereof. ( 22 )

44. In keeping with that approach, profits made by the PE will normally come within the sphere of the taxation powers of the State where the PE is established, without being imputed to the company creating the PE and resident in the State of origin, unless there is a mechanism created by statute or convention that provides for an exception from this rule. That is what happens in this case, for, as I shall explain below, the Danish legislature has no reservations about taxing the PEs of Danish companies situated in Finland (within the joint taxation scheme).

45. The criteria laid down in the judgment in Marks & Spencer were shaped by reference to the parent company/subsidiaries pairing. However, the Court subsequently applied those criteria, in the judgment in Lidl Belgium, ( 23 ) to the losses of non-resident PEs, which may be deducted by the principal company on the terms set out in paragraph 55 of the judgment in Marks & Spencer.

46. The placing of subsidiaries and PEs on an equal footing for those purposes, as done in the judgment in Lidl Belgium (implicitly, but decisively) in 2008, ( 24 ) was in turn qualified in 2010 by the judgment in X Holding. ( 25 ) The contradiction between the two is perhaps due to a disputed aspect ( 26 ) of the assessment of whether tax situations are comparable, a controversial stage in the process of establishing whether a tax restriction on the freedom of establishment is compatible with EU law.

47. In X Holding, the Court held that ‘permanent establishments situated in another Member State and non-resident subsidiaries are not in a comparable situation with regard to the allocation of the power of taxation as provided for in an agreement such as the Double Taxation Agreement, and in particular in Articles 7(1) and 23(2) thereof’. ( 27 ) Therefore, the emphasis was placed not on the comparability of situations in the abstract but rather in relation to the tax provision (of national law or of a convention) taking them into consideration.

48. The same approach may be extended to the resident PE/non-resident PE pairing. That follows from the judgment of 17 July 2014, Nordea Bank Danmark, ( 28 ) in which the Court examined the system of reincorporation of the losses of a non-resident PE, in the context of the Danish legislation (preceding that examined in this case) on the profits of resident companies.

49. In that judgment, the Court stated, ‘as regards comparability of the situations’, that, ‘in principle’, PEs established in another Member State and resident PEs could not be equated with one another ‘in relation to measures laid down by a Member State in order to prevent or mitigate the double taxation of a resident company’s profits’. However, the Court then went on to point out that, ‘by making the profits of permanent establishments situated in Finland, Sweden and Norway subject to Danish tax, the Kingdom of Denmark has equated those establishments with resident permanent establishments so far as concerns the deduction of losses (see, by analogy, the judgment in Denkavit Internationaal and Denkavit France, C‑170/05, EU:C:2006:783, paragraphs 34 and 35)’. ( 29 )

50. In the subsequent judgment in Timac Agro Deutschland, ( 30 ) the Court confirmed that, in principle, resident and non-resident PEs are not in a comparable situation, following the judgment in Nordea Bank Danmark, ( 31 ) paragraph 24 of which the Court cited. However, the Court immediately added that, as the German legislation applicable at that time had equated the two categories of PE, ‘in those circumstances, the situation of a resident company with a permanent establishment situated in Austria is accordingly comparable to that of a resident company with a permanent establishment situated in Germany’. ( 32 )

51. That line of case-law makes it clear that it is hard to ascertain whether any definite criteria actually exist for establishing when parent companies, subsidiaries and PEs are in objectively comparable situations, according to whether they are resident or non-resident in a Member State. The fact that the Court has inevitably had to proceed case by case for want of positive rules in this area (apart from Article 49 TFEU) is likely to create a certain feeling of uneasiness, even uncertainty, ( 33 ) on the part of lawyers who seek foreseeable solutions. However, that is not a sufficient reason for omitting the analysis of the objective comparability of situations, to which the Court frequently has recourse.

52. Two inferences may be drawn from the foregoing. The first is that, as a general rule, the tax treatment of non-resident PEs and foreign subsidiaries must be equivalent as far as the deduction of definitive losses that cannot be absorbed in the PE’s State of establishment is concerned, as the Court ruled in Lidl Belgium. ( 34 )

53. That criterion is, in my opinion, the most consistent with the principle underlying Directive 2011/96/EU, ( 35 ) recital 9 of which declares that ‘the payment of profit distributions to, and their receipt by, a permanent establishment of a parent company should give rise to the same treatment as that applying between a subsidiary and its parent’. I believe that the equal treatment thus affirmed for the payment of profits may also be applied to losses incurred by a PE, so that PEs must be placed on an equal footing with subsidiaries for those specific purposes.

54. Unless I am mistaken, that criterion is also confirmed by the approach taken in Directive (EU) 2016/1164/EU ( 36 ) to combat tax avoidance in the internal market. While inapplicable ratione temporis to this reference for a preliminary ruling, that directive sheds some light on the matter by requiring, in recital 4 and, in particular, in Article 7, the application of the same tax rules to entities and ‘to permanent establishments of those corporate taxpayers which may be situated in other Member State(s)’.

55. In addition, according to the order for reference, Denmark does, in fact, equate the treatment of non-resident PEs with that of non-resident subsidiaries: with reference to international joint taxation, Paragraph 31A of the Law on corporation tax treats ‘non-Danish companies … in the group’ in the same way as ‘all permanent establishments and real property situated outside Denmark belonging to those jointly taxed … companies’.

56. The second inference concerns the objective comparability of resident and non-resident PEs. Much of the debate in the written procedure and, above all, in the oral procedure, concerned this matter. In the face of the Commission’s ( 37 ) reservations regarding the solution adopted by the Court in Nordea Bank Danmark ( 38 ) and Timac Agro Deutschland, ( 39 ) most of the governments entering an appearance in this reference for a preliminary ruling argue that it should be applied without more ado, which would mean that the situation of Bevola’s PE in Finland is not comparable to that of a PE in Denmark.

57. However, I do not believe that the application of those two judgments to this case automatically leads to denial of the objective comparability with which the proceedings have been concerned. On the one hand, the losses examined in those judgments were, so to speak, recurring, that is to say, they occurred year after year, which promoted the ‘cherry picking’ of the most favourable periods; by contrast, Bevola’s PE was faced with losses in the last year of its existence, the year in which it closed. That seemingly unimportant factor is, in fact, important, as I shall explain below. On the other hand, if the assessment of comparability must be made in relation to the content and the aim of the relevant national legislation, it will be necessary to take into account the presentation of the national provisions set out in the order for reference.

58. When a PE incurs losses and decides to bring its activities to an end by closing, there must be a sale of assets, realisation of loans and payment of debts, resulting in a balance (the winding-up balance). The losses of a resident PE arising from that closure, reflected in the winding-up balance, are transferred directly to the company to which the PE belongs. However, when those same definitive losses ( 40 ) are those of a non-resident PE, they may not be transferred to any entity within the State in which that PE was situated. Accordingly, since those losses cannot deducted from the basis of assessment of the company which set up the PE, they will be left in a vacuum.

59. That is the situation envisaged by the Marks & Spencer exception, the application of which is particularly justified when the definitive losses of a non-resident PE are identified as entailing, for the proprietor company, a reduction in its assets which is reflected in a reduction in its economic and, therefore, taxpaying capacity. Accordingly, in the case of definitive losses associated with the closure of a PE, the analysis of the objective comparability of the situations must not lose sight of that factor. The situation of a resident PE and that of a non-resident PE, both having definitive losses, are, specifically for that reason, comparable from the point of view of the principle of the taxpaying capacity of the parent company.

60. I do not believe that that approach conflicts with the judgments in Nordea Bank Danmark ( 41 ) and Timac Agro Deutschland. ( 42 ) In those two judgments, the comparability of resident and non-resident PEs was based on the existence of provisions from which a link was derived between the non-resident PE and the tax authority of the State of the company responsible for the PE. Here, that link arises as a result of a definitive loss, which must be imputed to the company which has sustained a financial loss as a result, so that the tax levied on that company reflects its actual taxpaying capacity.

61. As regards the international joint taxation scheme, the aim of the Danish law does not appear to be to ‘prevent or mitigate the double taxation of a resident company’s profits’, unlike the situation in the judgments in Nordea Bank Danmark ( 43 ) and Timac Agro Deutschland. ( 44 ) Moreover, that mechanism could create instances of joint taxation, for, in Paragraph 31A of the Law on corporation tax, Denmark assumes the power to tax the revenue of ‘all’ non-resident subsidiaries and ‘all’ non-resident PEs, where both belong to parent companies resident in Denmark.

62. In my opinion, that circumstance contributes to the consideration that the assessment of comparability in this case must result in placing resident PEs on an equal footing with non-resident PEs. If the Danish legislation includes the revenue of resident and non-resident PEs within Denmark’s power to impose taxes, treating them in the same way for the purposes of international joint taxation (Paragraph 31A of the Law on corporation tax), it ‘[makes] the profits of permanent establishments situated in Finland … subject to Danish tax’, from which it follows that it ‘[equates] those establishments with resident permanent establishments [in Denmark]’. That was the criterion of objective comparability of the situations which the Court used in the judgment in Nordea Bank Danmark. ( 45 )

63. Therefore, it is certain that, in the legislative context of this dispute, the definitive losses of a non-resident PE in Denmark, incurred in the year in which that PE closed and which cannot be recovered in Finland, may be equated with the losses of a resident PE in Denmark, when the company owning both PEs is resident in Denmark.

B. The effects of the Danish ‘international group relief’ scheme on the application of the ‘Marks & Spencer exception’

64. A difference in tax treatment, in the State of the parent company, between resident and non-resident subsidiaries and PEs may entail, for that company, a barrier to the exercise of its freedom of establishment by deterring it from creating subsidiaries or PEs in other Member States. The provision of the TFEU in question is, therefore, Article 49 and that difference in treatment between residents and non-residents involves, in principle, a restriction of the freedom affirmed therein.

65. The Court has addressed the difficulties arising as a result of the rules of certain Member States allowing resident group companies to opt into a group tax relief scheme but excluding from that scheme non-resident companies, over which they do not exercise their taxation powers. In that situation, a non-resident group subsidiary may not transfer its losses to a resident parent company because the national legislation prohibits its participation in the tax-integrated group. ( 46 ) In the case with which this reference for a preliminary ruling is concerned, the same situation arises, albeit in relation to PEs.

66. The judgment in Marks & Spencer can serve to settle the matter without excessive difficulty, once non-resident subsidiaries and PEs are compared. As I pointed out above when referring to the remarks made by the national court, it must be presumed that, in this case, the situation is similar to that examined in that judgment: it concerns a PE in Finland whose non-recoverable (final) losses in that country may not be deducted from the profits of the Danish parent company, in accordance with the Danish national tax relief scheme.

67. The distinctive element is that the Danish legislation: – on the one hand, governs the ‘national joint taxation’ scheme, according to which corporation tax for the whole group (which takes into account profits of resident companies, PEs and the real property of Danish companies situated in Denmark) is assessed as part of a group relief scheme; – on the other, provides for the right to opt into the ‘international joint taxation’ scheme, which will apply to the profits of both Danish and foreign group companies, in addition to all their PEs abroad for a minimum period of 10 years.

68. The Danish tax authorities (and those of other Member States which have intervened in support of Denmark) submit that the ‘international joint taxation’ scheme enables the definitive losses of non-resident PEs to be deducted in full. The Danish tax regime does not, therefore, constitute a barrier to the freedom of establishment, within the meaning of the judgment in Marks & Spencer, since Danish companies could always opt for the international group relief scheme.

69. In the line of argument developed in the judgment in Marks & Spencer, the emphasis was placed on the lack of proportionality of a national measure the ultimate effect of which was that the losses of a non-resident subsidiary could not be recovered at all. Applying that criterion, the referring court must, as I have already pointed out, ascertain the specific circumstances surrounding the alleged impossibility of deducting, in Finland, the losses incurred by Bevola’s PE in that country.

70. If that presumption should be confirmed, the Marks & Spencer exception would come into play and the balance be tipped towards unjustified infringement of the freedom of establishment, inasmuch as the definitive losses of the Finnish PE may not be deducted.

71. Is the fact that the Danish legislation offers resident companies the opportunity of opting into the international joint taxation scheme, with the consequent possibility of deducting, in the context of that scheme, the definitive losses of non-resident subsidiaries and PEs, enough to counter that conclusion?

72. The answer depends logically on the way in which that scheme is regulated. In principle, it may be acceptable or equally it may involve an unacceptable restriction of the freedom of establishment. In my view, the analysis of the scheme must focus on two areas: (a) the subjective scope of the international tax relief scheme (in particular, whether it is intended to cover all the companies and all the PEs in a group), and (b) the temporal scope of the application of that tax scheme.

73. From the first perspective, the Danish measure appears to reflect a concern shared by the Court in this area. In the judgment in X Holding, ( 47 ) for example, the Court observed that, ‘to give companies the option of having their losses taken into account in the Member State in which they are established or in another Member State would seriously undermine a balanced allocation of the power to impose taxes between the Member States, since the tax base would be increased in the first Member State, and reduced in the second, by the amount of the losses transferred (see Marks & Spencer, paragraph 46, Oy AA, paragraph 55, and Lidl Belgium, paragraph 32)’.

74. In that case, the effects of application of the national tax regime to non-resident subsidiaries was that it enabled parent companies to ‘cherry pick’, which was not compatible with the preservation of the balanced allocation of the power to impose taxes between Member States. ( 48 ) The desire to avoid that outcome is clear in the Danish legislative proposal amending corporation tax, transcribed in part in the order for reference: ‘otherwise the companies would be able to avoid Danish taxation merely by allowing foreign loss-making activities to be carried out by foreign branches, whilst profit-making activities would be placed with companies not included in the Danish tax calculations’. ( 49 )

75. A tax scheme which, in those terms, allows group relief but does not provide for the option of delimiting the ‘dimensions of group relief’, because it requires all companies and all PEs in the group to be part of the scheme, certainly prevents a parent company from ‘cherry picking’ which non-resident entities’ profits it wishes to claim relief for, thereby risking the integrity of the tax base. Moreover, from that perspective, international groups and national groups would be treated as equivalent, making them subject to the same rules, and this would contribute to safeguarding the coherence of the tax system, by ensuring symmetry between the taxation of profits and the deduction of losses.

76. However, the risk that such ‘cherry picking’ will occur in a case of this kind is minimal. It should be recalled that the tax year in question was the final year of trading in Finland for Bevola’s PE; that is, the year in which the PE closed. Therefore, it is not a situation readily comparable to other situations in which a parent company, which has non-resident subsidiaries or PEs whose survival is in doubt, decides for its own convenience to deduct the losses incurred by the latter.

77. I believe, nonetheless, that the solution adopted by the Danish legislature to counteract the Marks & Spencer exception is disproportionately onerous for undertakings which, under the protection of Article 49 TFEU, wish to exercise their freedom of establishment in other Member States. That the application of the scheme is optional does not stop it being excessively restrictive or possibly incompatible with EU law. ( 50 )

78. I believe that the scheme at issue is, firstly, unrealistic, at least with regard to Danish groups of companies that operate globally (or, at least, which have subsidiaries and PEs in many countries). The national legislature acknowledged as much, with laudable frankness, in the observations annexed to its legislative proposal. ( 51 ) It is true that no principle requires a Member State to bring its legislation into line with the interests of groups of companies. However, the application of Article 49 TFEU must be protected (in this case, from its consequences in relation to the deduction of definitive losses, as encapsulated in the judgment in Marks & Spencer) using legislative solutions that, although inspired by the need to prevent tax avoidance by means of artificial arrangements, do not render that deduction impossible in practice, whatever the financial importance of the group, when there are legitimate reasons to deduct definitive losses. Otherwise, the balance between taxpaying capacity and the tax actually payable would be upset.

79. From the second perspective, the minimum period of 10 years during which the international taxation scheme must apply is also disproportionate and constitutes a significant unjustified obstacle to the exercise of the option. In view of the events that may affect the composition of the group (transfers or conversions — substantial or otherwise — of the entities which form part of it), I am not persuaded by the Danish Government’s line of argument on the necessity of fixing such a long period in order to prevent ‘cherry picking’. The unwanted conduct which it seeks to combat (the selection of the periods in which the group makes global losses and the exclusion of tax years in which it makes a profit) could be avoided, for example, by requiring the selection of the international joint taxation scheme to be made some time in advance of the tax year in which the scheme will be applied, without requiring participation in the scheme for such a long period, which is unrealistic with regard to the lifespan of a company.

80. It is true that the case-law has stated that ‘Member States are free to adopt or to maintain in force rules having the specific purpose of precluding from a tax benefit wholly artificial arrangements whose purpose is to circumvent or escape national tax law’, but it has also stated that ‘although direct taxation falls within their competence, Member States must nonetheless exercise that competence consistently with Community law’, ( 52 ) which extends to respect for the requirements of the principle of proportionality when those national rules are applied.

81. In short, I believe that the ‘international joint taxation’ scheme laid down in the Danish legislation does not observe the principle of proportionality inasmuch as, in circumstances such as those at issue in this case, it prevents a Danish company from deducting, in accordance with paragraph 55 of the judgment in Marks & Spencer, definitive losses incurred by its PE situated in Finland.

VI. Conclusion

82. In the light of the foregoing considerations, I propose that the Court reply as follows to the question referred for a preliminary ruling by the Østre Landsret (Eastern Regional Court, Denmark): In conditions similar to those considered in the judgment of the Court of Justice of 13 December 2005, Marks & Spencer (C‑446/03, EU:C:2005:763), the legislation of a Member State in accordance with which a company resident in that State may deduct from the basis of assessment for corporation tax the losses of a national permanent establishment but not those of a permanent establishment situated in another Member State, in which those losses may definitively not be taken into account, is not compatible with Article 49 TFEU. That the parent company may opt into an ‘international joint taxation scheme’, such as that provided for in the national legislation applicable to the case in the main proceedings, which requires it to group together, for the purposes of the same tax, all its subsidiaries and all its permanent establishments situated outside Denmark for a period of 10 years, is not sufficient to prevent that legislation being incompatible with EU law.

( 1 ) Original language: Spanish.

( 2 ) Judgment of 13 December 2005, C‑446/03, ‘judgment in Marks & Spencer, EU:C:2005:763.

( 3 ) In support of its contention, Bevola relies on the preparatory documents for the national legislation, which acknowledge that groups of a certain size will not find that scheme attractive.

( 4 ) Bevola cites the judgment of 18 March 2010, Gielen, C‑440/08, EU:C:2010:148, paragraph 53.

( 5 ) The Austrian Government refers to the judgment of 17 July 2014, Nordea Bank Danmark, C‑48/13, EU:C:2014:2087, paragraph 24.

( 6 ) The Austrian Government relies in that connection on the judgment of 7 November 2013, K, C‑322/11, EU:C:2013:716, paragraph 51.

( 7 ) Judgment of 17 July 2014, C‑48/13, EU:C:2014:2087.

( 8 ) Judgment of 17 December 2015, C‑388/14, EU:C:2015:829.

( 9 ) Judgments of 6 September 2012, Philips Electronics UK, C‑18/11, EU:C:2012:532, paragraph 19; of 21 February 2013, A, C‑123/11, EU:C:2013:84, paragraph 35; and of 1 April 2014, Felixstowe Dock and Railway Company and Others, C‑80/12, EU:C:2014:200, paragraph 26.

( 10 ) Judgment of 17 July 2014, C‑48/13, EU:C:2014:2087.

( 11 ) Judgment of 17 December 2015, C‑388/14, EU:C:2015:829.

( 12 ) Judgment of 15 May 2008, C‑414/06, EU:C:2008:278, paragraph 51.

( 13 ) There appears to still be some uncertainty as to whether the losses may be recovered, under Finnish law, in future years, if Bevola’s PE in that country is reopened. However, Bevola has ruled out that possibility.

( 14 ) Judgment of 17 December 2015, Timac Agro Deutschland, C‑388/14, EU:C:2015:829.

( 15 ) Judgment in Marks & Spencer, paragraph 27: ‘provisions of a Member State which prevent a resident parent company from deducting from its taxable profits losses incurred in another Member State by a subsidiary established in that Member State although they allow it to deduct losses incurred by a resident subsidiary’.

( 16 ) Ibid., paragraph 51.

( 17 ) Ibid., paragraph 55: ‘the restrictive measure at issue in the main proceedings goes beyond what is necessary to attain the essential part of the objectives pursued where: — the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods, if necessary by transferring those losses to a third party or by offsetting the losses against the profits made by the subsidiary in previous periods, and — there is no possibility for the foreign subsidiary’s losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party’.

( 18 ) In her Opinion in Case C‑172/13, Commission v United Kingdom (EU:C:2014:2321) [judgment of 3 February 2015], Advocate General Kokott noted that, at that time, there had been ‘registered 142 academic publications which deal directly with the judgments mentioned’.

( 19 ) See, inter alia, Danish, M., ‘What remains of the Marks & Spencer exception for final losses? — Examining the impact of Commission v. United Kingdom (Case C‑172/13)’, European taxation, Amsterdam, Vol. 55 (2015), No 9, pp. 417 to 422; Cerioni, L., ‘The never-ending issue of cross-border loss compensation within the EU: reconciling balanced allocation of taxing rights and cross-border ability-to-pay’, EC tax review, Alphen aan den Rijn, Vol. 24 (2015), No 5, pp. 268 to 280; Lang, M., ‘Has the case law of the ECJ on final losses reached the end of the line?’, European taxation, Amsterdam, Vol. 54 (2014), No 12, pp. 530 to 540; Pinetz, E., and Spies, K., ‘“Final losses” after the decision in Commission v. UK (“Marks & Spencer II”)’, EC tax review, Alphen aan den Rijn, Vol. 24 (2015), No 6, pp. 309 to 329.

( 20 ) Case C‑172/13, Commission v United Kingdom, EU:C:2015:50.

( 21 ) At the hearing, the Commission — I believe rightly — emphasised that point.

( 22 ) The Court has already had occasion to decide that, for the purposes of the allocation of powers of taxation, it is not unreasonable for the Member States to find inspiration in international practice and, particularly, the model conventions drawn up by the OECD. See judgments of 12 May 1998, Gilly, C‑336/96, EU:C:1998:221, paragraph 31, and of 23 February 2006, van Hilten-van der Heijden, C‑513/03, EU:C:2006:131, paragraph 48.

( 23 ) Judgment of 15 May 2008, C‑414/06, EU:C:2008:278. The uncertainty which led to the reference for a preliminary ruling in that case was ‘whether Articles 43 EC and 56 EC preclude a national tax regime which does not allow a resident company, for the purposes of determining its profits and calculating its taxable income, to deduct losses incurred in another Member State by a permanent establishment belonging to it, when that tax regime does allow losses incurred by a resident permanent establishment to deduct those losses’.

( 24 ) Judgment of 15 May 2008, C‑414/06, EU:C:2008:278.

( 25 ) Judgment of 25 February 2010, C‑337/08, EU:C:2010:89.

( 26 ) It should be recalled that, in her Opinion in Nordea Bank Danmark, C‑48/13, EU:C:2014:153, Advocate General Kokott proposed abandoning the ‘traditional’ method of analysis, in accordance with which it is necessary to ‘first of all to examine whether companies with a domestic branch and those with a branch in another Member State are in an objectively comparable situation, having regard to the aim pursued by the national provisions at issue’. In the judgment of 17 July 2014 in that case (EU:C:2014:2087), the Court did not accept that proposal and since then it has continued assessing whether (domestic and cross-border) tax situations are comparable in the light of the aim of the national provision which introduced the restriction of freedom of establishment.

( 27 ) Judgment of 25 February 2010, C‑337/08, EU:C:2010:89, paragraph 38 (no italics in the original).

( 28 ) Case C‑48/13, EU:C:2014:2087.

( 29 ) Ibid., paragraph 24.

( 30 ) Judgment of 17 December 2015, C‑388/14, EU:C:2015:829, paragraph 27.

( 31 ) Case C‑48/13, EU:C:2014:2087.

( 32 ) Judgment of 17 December 2015, Timac Agro Deutschland, C‑388/14, EU:C:2015:829, paragraph 28.

( 33 ) That is perhaps why the order for reference sets out the remarks from Legislative Proposal No 121, Folketingstidende (Danish Parliamentary Bulletin) 2004/2005, to the effect that ‘it is particularly difficult to ascertain whether the proposed rules will give rise to a restriction contrary to EU law rules’.

( 34 ) Judgment of 15 May 2008, C‑414/06, EU:C:2008:278.

( 35 ) Council Directive of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ 2011 L 345, p. 8).

( 36 ) Council Directive of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (OJ 2016 L 193, p. 1).

( 37 ) The Commission qualified those reservations at the hearing, stating that they were in fact confined to paragraph 24 of the judgment of 17 July 2014, Nordea Bank Danmark, C‑48/13, EU:C:2014:2087, repeated at paragraph 65 of the judgment of 17 December 2015, Timac Agro Deutschland, C‑388/14, EU:C:2015:829. The Commission wishes to ensure that those passages are not interpreted in such a way as to suggest that, in order to deny the objective comparability of the situations of resident and non-resident PEs, it is sufficient that a State does not treat them the same, whatever the circumstances may be.

( 38 ) Judgment of 17 July 2014, C‑48/13, EU:C:2014:2087.

( 39 ) Judgment of 17 December 2015, C‑388/14, EU:C:2015:829.

( 40 ) To which the judgment in Marks & Spencer refers at paragraph 55.

( 41 ) Judgment of 17 July 2014, C‑48/13, EU:C:2014:2087.

( 42 ) Judgment of 17 December 2015, C‑388/14, EU:C:2015:829.

( 43 ) Judgment of 17 July 2014, C‑48/13, EU:C:2014:2087.

( 44 ) Judgment of 17 December 2015, C‑388/14, EU:C:2015:829.

( 45 ) Judgment of 17 July 2014, C‑48/13, EU:C:2014:2087, paragraph 24.

( 46 ) Judgments in Marks & Spencer, paragraphs 22 and 24; of 25 February 2010, X Holding, C‑337/08, EU:C:2010:89, paragraphs 18 and 19; of 2 September 2015, Groupe Steria, C‑386/14, EU:C:2015:524, paragraphs 18 and 19; and of 6 October 2015, Finanzamt Linz, C‑66/14, EU:C:2015:661, paragraphs 27 and 28.

( 47 ) Judgment of 25 February 2010, C‑337/08, EU:C:2010:89, paragraph 29.

( 48 ) The Court further observed, at paragraph 32 of that judgment that, ‘since the dimensions of the tax entity can therefore be altered, acceptance of the possibility of including a non-resident subsidiary in such an entity would have the consequence of allowing the parent company to choose freely the Member State in which the losses of that subsidiary are to be taken into account (see, to that effect, Oy AA, paragraph 56, and Lidl Belgium, paragraph 34)’.

( 49 ) Legislative Proposal No 121, Folketingstidende (Danish Parliamentary Bulletin) 2004/2005, Annex A, column 4946, paragraph 10.

( 50 ) Judgment of 18 March 2010, Gielen, C‑440/08, EU:C:2010:148: ‘the fact that a national scheme which restricts the freedom of establishment is optional does not mean that it is not incompatible with European Union law’ (paragraph 53). Although that case arose in a different context from that examined here, the validity of the principle established in that judgment extends beyond the particular circumstances of the case at issue in those proceedings.

( 51 ) ‘… in practice, it is likely that at least large-scale international groups, for both financial and administrative reasons, will not consider it advantageous to include the group’s worldwide income for Danish tax purposes.’ The statistical data included in the order for reference reveal how unattractive the scheme has been in practice for Danish groups of companies.

( 52 ) Judgment in Marks & Spencer, paragraphs 57 and 29, respectively.