AG Opinion – Freedom of establishment and transfer pricing

15 December 2017
Author: JHA

C-382/16 Hornbach-Baumarkt

The German tax authorities carried out a tax assessment on Hornbach and found that the free of charge comfort letters the company sent to banks and creditors, containing a guarantee for the benefit of its foreign subsidiaries from which it did not receive any remuneration, had not been granted on arm’s length terms, thereby increasing Hornbach’s business tax. Hornbach challenged the assessment before the referring court, arguing that German legislation providing for the adjustment of taxation of transactions between related companies to reflect arm’s length terms violates the EU Treaty provisions on freedom of establishment. The referring court asked whether the relevant rule under German law is compatible with the EU Treaty provisions on freedom of establishment, but more specifically, whether a Member State can prevent companies from shifting profits out of its jurisdiction by requiring income to be declared on the basis of ‘arm’s length conditions’? And can it impose such a requirement only in relation to cross-border transactions and not domestic ones without falling foul of the Treaty rules on freedom of establishment?

The Advocate General answered yes to both questions and concluded that the German transfer pricing legislation did not violate the EU concept of freedom of establishment, and even if it were a restriction on the freedom of establishment it was justified on the basis of the preservation of the balanced allocation of powers. The Advocate General also considered the discrimination approach and the restriction approach when analysing situations of alleged infringement of freedom of establishment in the area of direct taxation, and invited the CJEU to articulate which approach applies and said that he favours the discrimination approach. If the CJEU adopts the discrimination approach, then the analysis should stop at the stage of comparability. 

This article appears in the JHA December 2017 Tax Newsletter, which also features:


  1. EU Council Guidelines – moving to phase two of the Brexit negotiations
Return to Listings