Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn.
Date: 2008-05-15
16. Even if it were to be accepted that the tax regime at issue in the main proceedings has restrictive effects on the free movement of capital, such effects would have to be seen as an unavoidable consequence of any restriction on freedom of establishment and they do not justify an examination of that regime in the light of Article 56 EC (see, to that effect, Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas  [2006] ECR I-7995, paragraph 33; Case C-452/04 Fidium Finanz  [2006] ECR I-9521, paragraphs 48 and 49; and Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-2107, paragraph 34).
18. It should be noted at the outset that freedom of establishment entails for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Community, the right to exercise their activity in other Member States through a subsidiary, branch or agency (see Case C-307/97 Saint‑Gobain ZN  [1999] ECR I-6161, paragraph 35; Case C-141/99 AMID [2000] ECR I-11619, paragraph 20; and Case C-471/04 Keller Holding [2006] ECR I-2107, paragraph 29).
19. Even though, according to their wording, the provisions of the EC 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 (see, inter alia, Case C-264/96 ICI [1998] ECR I-4695, paragraph 21, and Case C-298/05 Columbus Container Services [2007] ECR I-0000, paragraph 33).
20. Those considerations also apply where a company established in a Member State carries on business in another Member State through a permanent establishment.
22. That definition of a permanent establishment as an autonomous fiscal entity is consonant with international legal practice as reflected in the model tax convention drawn up by the Organisation for Economic Cooperation and Development (OECD), in particular Articles 5 and 7 thereof. The Court has already held that, for the purposes of the allocation of fiscal competence, it is not unreasonable for the Member States to draw guidance from international practice and, particularly, the model conventions drawn up by the OECD (see Case C‑336/96 Gilly  [1998] ECR I-2793, paragraph 31, and Case C-513/03 van Hilten-van der Heijden  [2006] ECR I-1957, paragraph 48).
23. As regards the tax regime at issue in the main proceedings, it must be pointed out that a provision which allows losses incurred by a permanent establishment to be taken into account in calculating the profits and taxable income of the principal company constitutes a tax advantage.
24. However, the provisions of that tax regime do not grant such a tax advantage where the losses are incurred by a permanent establishment situated in a Member State other than that in which the principal company is established.
25. In those circumstances, the tax situation of a company which has its registered office in Germany and has a permanent establishment in another Member State 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 another Member State.
26. It must be held that the tax regime at issue in the main proceedings involves a restriction on the freedom of establishment.
Whether a justification exists
27. 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 (see Case-C446/03 Marks & Spencer [2005] ECR I-10837, paragraph 35; Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 47; and Test Claimants in the Thin Cap Group Litigation , paragraph 64).
31. As regards the first of these justifications, it should be noted that the preservation of the allocation of the power to impose taxes between Member States may make it necessary to apply to the economic activities of companies established in one of those States only the tax rules of that State in respect of both profits and losses (see Marks & Spencer , paragraph 45, and Case C-231/05 Oy AA  [2007] ECR I‑6373, paragraph 54).
32. To give companies the right to elect to have 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 State, and reduced in the second, by the amount of the losses surrendered (see Marks & Spencer , paragraph 46, and Oy AA , paragraph 55).
33. With respect to the relevance of the first of these justifications in the light of the facts in the main proceedings, it should be pointed out that the Member State in which the registered office of the company to which the permanent establishment belongs is situated would, in the absence of a double taxation convention, have the right to tax the profits generated by such an entity. Consequently, the objective of preserving the allocation of the power to impose taxes between the two Member States concerned, which is reflected in the provisions of the Convention, is capable of justifying the tax regime at issue in the main proceedings, since it safeguards symmetry between the right to tax profits and the right to deduct losses.
34. In circumstances such as those of the main proceedings, to accept that the losses of a non-resident permanent establishment might be deducted from the taxable income of the principal company would result in allowing that company to choose freely the Member State in which those losses could be deducted (see, to that effect, Oy AA , paragraph 56).
35. As regards the second justification put forward in the observations submitted to the Court, which is based on the danger that losses might be taken into account twice, the Court has accepted that the Member States must be able to prevent such a danger (see Marks & Spencer , paragraph 47, and Case C-347/04 Rewe Zentralfinanz  [2007] ECR I‑2647, paragraph 47).
36. In this connection, it must be pointed out that, in circumstances such as those which underlie the main proceedings, there is clearly a danger that the same losses will be used twice (see Marks & Spencer , paragraph 48). It is possible that a company might deduct, in the Member State in which its seat is situated, losses incurred by a permanent establishment belonging to it and situated in another Member State and that, despite such offsetting, the same losses might be taken into account subsequently in the Member State in which the permanent establishment is situated, when that establishment generates profits, thereby preventing the Member State in which the principal company has its seat from taxing that profit.
38. The national court asks, however, whether the justifications set out in paragraphs 44 to 50 of the judgment in Marks & Spencer , which also include the need to prevent the risk of tax avoidance, must be understood as being cumulative or whether the existence of only one of those factors is sufficient for the tax regime at issue in the main proceedings to be treated, in principle, as being justified.
39. It must be pointed out in that regard that, in paragraph 51 of the judgment in Marks & Spencer , the Court held that the three justifications taken together, which underlay the legislation at issue in the main proceedings, pursued legitimate objectives compatible with the Treaty and thus constituted overriding reasons in the public interest
40. However, bearing in mind the wide variety of situations in which a Member State may put forward such reasons, it cannot be necessary for all the justifications referred to in paragraph 51 of the Marks & Spencer judgment to be present in order for national tax rules which restrict the freedom of establishment laid down in Article 43 EC to be capable, in principle, of being justified.
41. Thus, in the judgment in Oy AA , the Court acknowledged in particular that the national tax legislation at issue could, in principle, be justified on the basis of two of the three justifications referred to in paragraph 51 of the judgment in Marks & Spencer , namely the need to safeguard the allocation of the power to tax between the Member States and the need to prevent tax avoidance, taken together (see Oy AA , paragraph 60).
42. Likewise, the tax regime at issue in the main proceedings can, in principle, be justified in the light of two of the factors referred to in paragraph 51 of the judgment in Marks & Spencer , namely the need to safeguard the allocation of the power to tax between the Member States and the need to prevent the danger that the same losses will be taken into account twice.
44. That being so, it remains necessary to examine whether the tax regime at issue in the main proceedings goes beyond what is necessary to attain the objectives pursued (see Marks & Spencer , paragraph 53, and Oy AA , paragraph 61).
46. It should be pointed out that reference was made in paragraph 54 of the judgment in Marks & Spencer  to the possibility of making the benefit of the tax advantage at issue subject to such a condition, together with the possibility of making the benefit of that advantage conditional upon the subsidiary established in a Member State other than that in which the principal company has its seat having taken full advantage of the possibilities available in its Member State of residence of having the losses taken into account.
47. In that regard, the Court held in paragraph 55 of the judgment in Marks & Spencer that a measure which restricts the freedom of establishment goes beyond what is necessary to attain the objectives pursued where a non-resident subsidiary has exhausted the possibilities for having the losses incurred in the Member State where it is situated taken into account for the accounting period concerned and also for previous accounting periods and where there is no possibility for that subsidiary’s losses to be taken into account in that State for future periods.
51. Accordingly, Lidl Belgium has not shown that the conditions laid down in paragraph 55 of the judgment in Marks & Spencer , for establishing the situation in which a measure constituting a restriction on the freedom of establishment for the purposes of Article 43 EC goes beyond what is necessary to attain legitimate objectives recognised by Community law, were satisfied.
52. It must be added that the Court has recognised the legitimate interest which the Member States have in preventing conduct which is liable to undermine the right to exercise the powers of taxation which are vested in them. In this connection, where a double taxation convention has given the Member State in which the permanent establishment is situated the power to tax the profits of that establishment, to give the principal company the right to elect to have the losses of that permanent establishment taken into account in the Member State in which it has its seat or in another Member State would seriously undermine a balanced allocation of the power to impose taxes between the Member States concerned (see, to that effect, Oy AA , paragraph 55).