The ECJ held that services by an EU head office, who is part of a VAT group, to its foreign branch are in general subject to VAT if the cost of such services are charged to the branch. For VAT purposes head office and its branch located in another Member State must be regarded as separate taxable persons. Continue reading
Tax & Legal
The ECJ has confirmed a German provision for the recapture of foreign branch losses previously deducted on sale of the foreign permanent establishment. Continue reading
An ECJ advocate general has suggested the court rule that a German rule requiring a bank to submit information to the tax authorities on the accounts of German residents held in foreign branches is a hindrance on the freedom of establishment justified by the need to ensure fair and uniform taxation. If this obligation conflicts with the laws of the other state, that state should allow its fulfilment, provided that fulfilment is not excessive.
A southern German bank maintained a branch in Austria, where a number of German residents held accounts. The German Inheritance and Gift Tax Act requires banks to inform the relevant tax authorities of the assets held or managed on behalf of deceased account holders. In 2008, the local inheritance tax office requested the bank for account information on all German resident account holders at its Austrian branch who had died since 2001. The German bank objected that it could not supply this information without infringing an Austrian bank secrecy rule making it a criminal offence to pass information on the affairs of an account holder to other than specified recipients without his or her consent. Tax offices were not one of the specified recipients and a deceased individual was no longer able to give consent.
This clash of laws brought the case before the ECJ. The advocate general has suggested that the court take the position that there is no direct clash of laws, given that the German rule is enshrined in a tax act, whereas the Austrian rule is a provision of the Banking Act with no specific mention of taxation. Rather, there is a restriction on the freedom of establishment to be found in the German rule, though this restriction is justified by the need to protect the integrity of the tax system and does not go beyond the minimum necessary to achieve that aim. The advocate general recognises that such a finding does nothing to solve the case at issue – the conflict of laws – and contents himself with the suggestion that the Austrian authorities be duty bound to apply, or disapply, their bank secrecy rule in a spirit of cooperation within the confines of European law. Quite how this could be expressed in an order by a European or German court in a case to which Austria is not a party, he does not say.
The ECJ case reference is C-522/14 Sparkasse Allgäu opinion of November 26, 2015.
An ECJ advocate general has suggested that neither the German refusal to allow a deduction for branch losses incurred in other member states, nor the recapture provision in the event of disposal of the branch offend against community law.
Up to 1998, German companies were able to deduct foreign branch losses, notwithstanding double tax treaty provisions for taxation solely in the country of source. However, this deduction was ultimately only temporary inasmuch as it was recaptured on future branch profits, or when the branch was disposed of, wound up or incorporated. A German subsidiary of a French group operated a consistently loss-making Austrian branch from 1997 to 2004. In 2005, the branch made a trading profit before transferring its assets and business to the Austrian subsidiary of the same group. The German tax office refused a deduction for the losses incurred from 1999 onwards and added the 1997/98 deductions back to income in 2005 under the recapture provisions, which remained (and remain) in force. The company objected to both adjustments as a restriction on its freedom of establishment, given that it would have been able to permanently deduct corresponding losses from a German branch.
The ECJ advocate general on the case has suggested the court rule that the refusal to continue to allow a deduction for foreign branch losses from EEA countries after 1998 is not a restriction on the company’s freedom of establishment. The company’s Austrian losses could be carried forward in Austria and were therefore not permanent. The Austrian branch was not in a comparable position to a German one and thus the loss deduction possibility in Austria as opposed to Germany was not a restriction on the freedom of establishment. Even if it were, it could still be justified by the need to preserve the internationally agreed allocation of taxing rights between treaty partner countries. By contrast, the advocate general agrees with the taxpaying company that the 2005 deduction recapture is a restriction on its freedom of establishment. However, he sees that restriction to be justified by the need to preserve the allocation of taxing rights, the coherence of the German taxation system and by the need to prevent the abuse of offsetting the same loss in both countries. He also points out that the losses were not final in the year they were incurred.
The ECJ case reference is C- 388/14 Timac Agro opinion of September 3, 2015.