Loss Relief – Impact of Relocating Your Company
November 25, 2019
A recent opinion by Advocate General Kokott in the AURES Holdings case (C-405/18) serves as a warning to those considering the relocation of their companies pursuant to the freedom of establishment granted under Articles 49 and 54 TFEU.
As background to this case, AURES Holdings (“Aures”) suffered a tax loss whilst it was established in the Netherlands in 2007. On 1 January 2008, it set up an organisational entity in the Czech Republic. Following the move, it remained a taxable entity in the Netherlands but did not carry on any economic activity. As such, it could no longer take the loss into account when calculating its tax liability in the Netherlands. Aures therefore looked to offset these losses against its tax liability in the Czech Republic. However, the tax authority for the Czech Republic refused this relief on the basis that the loss had not been suffered in the Czech Republic.
Following proceedings brought by Aures to challenge this decision, the ECJ has been asked to determine (a) whether such circumstances fall within the remit of freedom of establishment and (b) if so, is it contrary to freedom of establishment to deny claims for a tax loss incurred in another member state before the relocation of the claiming company?
The Advocate General made three key findings. First, she confirmed that Aures’ relocation should fall within the scope of freedom of establishment. Second, and most importantly, she considered that, whilst there was a restriction imposed by the Czech Republic, this restriction was justified on the basis of the balanced allocation of taxing powers. Third, she found that the restriction was proportionate as no less severe restriction was evident.
It is also interesting to note that AG Kokott referenced the contentious nature of the Marks & Spencer decision, which led her to conclude that the principle contained therein (that a subsidiary or a permanent establishment’s final losses could be used by the parent) should not be extended.