In its decision of 22 September 2022, the European Court of Justice upheld the German rule that the final losses of a permanent establishment (PE) located in the United Kingdom are not deductible for the German head office (parent company). This practice is not contrary to the principle of freedom of establishment. There is no obligation under EU law to take such losses into account because Germany as the state of residence has waived its power to tax the profits (and losses) of its UK PE under the UK/German double tax treaty.
Following the request for a preliminary ruling from the German Supreme Tax Court, the European Court of Justice (ECJ) is called to decide whether a German parent company has the right to deduct from its taxable income losses incurred by its UK branch, which had ceased activity and thus could no longer utilize its accumulated tax losses in the UK. In his Opinion, the Advocate General has suggested that the German rules denying the import of losses of foreign branches are not contrary to the EU principles of freedom of establishment.
The Lower Tax Court of Hesse, with reference to the ECJ case Bevola und Jens W. Trock, decided that final losses of a foreign (UK) permanent establishment are deductible in Germany.
