In its ruling of 22 February 2023, the Federal Fiscal Court (BFH) made an important and final decision for German companies operating internationally, in particular corporations such as GmbHs: According to this ruling, domestic companies cannot offset losses from a permanent establishment located in another EU country against profits generated in Germany to reduce tax if the relevant double taxation agreement (DTA) does not provide for a German right of taxation for the foreign income. This also applies if the losses abroad cannot be utilised for tax purposes under any circumstances and are therefore to be classified as "final" (so-called final losses). Such an exclusion does not violate European Union law.
In the case decided by the BFH, a bank based in Germany had opened a branch in the UK (then still an EU member state) in 2004. After the branch had consistently generated only losses, it was closed again in 2007. As the branch had never made a profit, the losses could not be utilised for tax purposes in the UK. The BFH clarified that these losses could not be utilised for tax purposes in Germany either.
Following an appeal to the Court of Justice of the European Union (ECJ), the latter confirmed the opinion of the BFH: the deduction of so-called final losses is also not required under EU law. The ECJ and BFH have thus abandoned their previous, sometimes more generous case law.
Practical note:
Companies with permanent establishments in other EU countries should regularly review their tax structures and seek tax advice at an early stage in the event of losses. Especially for internationally active GmbHs and partnerships, there is a risk that losses will not be recognised for tax purposes either abroad or at home - a so-called double non-recognition.
Yours TAXGATE team advises companies on international tax law, on the optimal utilisation of losses within a group of companies and on the avoidance of double taxation.
