The Advocate General of the European Court of Justice recently issued his opinion in a case concerning whether the Danish rules on joint taxation of companies comply with the EU rules on freedom of establishment.
It is the opinion of the Advocate General, that the EU rules on freedom of establishment in principle does not preclude national legislation such as the Danish rules on joint taxation, where a loss pertaining to a permanent establishment (PE) of a foreign company can only be offset against income of Danish group companies, if the rules in the resident country of the foreign company precludes utilisation of the loss.
However, Danish legislation would not comply with EU law, if it does not permit deduction of a loss in Denmark, when the foreign company has definitively proved that the loss cannot be deducted in its country of residence. Whether this is indeed the case must be determined by the referring Danish court, according to the opinion of the Advocate General.
The ruling from the European Court of Justice is expected later this year.
In Denmark, national joint taxation between all Danish entities within a group is mandatory.
International joint taxation between all entities within a group is optional.
Election of international joint taxation is binding for a period of 10 years.
Income/loss from PEs outside Denmark is excluded when calculating income of Danish companies, unless international joint taxation is elected.
A tax loss in a Danish permanent establishment can only be utilized within a joint taxation, if the loss cannot be utilized abroad.
In the case before the European Court of Justice (C-28/17), a Swedish group decided to merge its two Danish PEs.
In Sweden, the company opted to treat the situation as a tax-exempt merger while in Denmark, it was treated as a taxable asset deal.
Consequently, the continuing PE had acquired goodwill subject to depreciation in Denmark but not in Sweden (tax-exempt merger). This resulted in a Danish tax loss for the continuing PE. The continuing PE was jointly taxed with a Danish subsidiary.
In the Danish joint taxation, utilization of the loss from the PE was denied, as under Swedish legislation, utilization of such a loss was permitted.
The question presented to the EU Court of Justice was whether this is a restriction on the freedom of establishment and if so, whether it is justifiable.
The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.