German capital gains tax deferral infringes freedom of establishment

April 21, 2015

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On 16 April 2015 the CJEU ruled in favour of the Commission in Case C-591/13 Commission v Germany.

Under the German tax rules, tax on capital gains realised upon the sale of certain capital assets (“the replaced assets”, which include mostly land and buildings) can be deferred by transferring those capital gains to newly acquired or produced capital assets (“the replacement assets”) until the sale of those replacement assets, provided certain conditions are fulfilled. The replacement assets must be acquired within a certain time period and must be held as a fixed asset of a domestic permanent establishment. The European Commission brought the present case against Germany asking the CJEU to rule that the latter condition restricts the freedom of establishment as it discourages German businesses from carrying out activities through permanent establishments located in other Member States.

Germany disputed the admissibility of the proceedings on two grounds, first that there was a delay in bringing the action, and secondly, that the subject-matter of the action has been altered. With regard to the first ground, the CJEU held that the Commission is not obliged to act within a specific period. The considerations which determine the Commission’s choice of time cannot affect the admissibility of the action, subject to situations in which the excessive duration of the pre-litigation procedure can make it more difficult for the Member State concerned to refute the Commission’s argument and thus infringe the rights of defence of that Member State. The CJEU also found that the subject-matter of the action has not been altered.

Germany also argued that the legislation is justifiable on the basis of the balanced allocation of the power to impose taxes, coherence of the tax system and that it provides for a tax benefit for natural or legal persons.

The CJEU rejected all the justification grounds that were raised and found that immediate taxation on gain reinvested in a Member State other than Germany is discriminatory in comparison to the roll-over relief available on reinvestment in Germany and is a restriction on the freedom of establishment.

Case C-591/13 Commission v Germany, 16 April 2015