In a judgment from February 22, 2023, Germany’s highest tax court – the Bundesfinanzhof (BFH) – ruled that German companies may not be able to offset losses incurred by a branch office in another EU country against profits generated in Germany as a means of reducing their tax burden.
Under international tax law, domestic companies cannot offset the losses of a branch located in another EU country against profits generated in Germany for the purpose of reducing their tax burden. That was the verdict of the BFH in a recent ruling (case ref.: I R 35/22). Commercial law firm MTR Legal Rechtsanwälte, whose areas of expertise include tax law, qualifies that, based on the Court’s case law, we can certainly say that this is not possible if according to the relevant double taxation agreement Germany is not entitled to tax the income generated abroad.
The plaintiff in the case in question was a bank based in Germany that had opened a UK branch in 2004. Unfortunately, the latter went on to consistently generate losses, resulting in its closure a mere three years later. The bank was unable to claim these losses against tax in the UK, as it had never turned a profit.
The bank subsequently sought to have the losses associated with the UK branch taken into account in Germany for the purpose of reducing its tax burden there. Citing the relevant double taxation agreement, the BFH found that it was also not possible to for the losses to be accounted for in Germany, because income from the UK is not subject to taxation in Germany. The Court noted that this is equally true for negative income, i.e., losses.
The Munich judges went on to clarify that this ban on deducting losses, including final losses, does not violate EU law, a position the Court arrived at after having appealed to the European Court of Justice for clarity. The ECJ confirmed that it had departed from its previous case law, according to which it was possible to deduct losses on account of the freedom of establishment in the EU. The BFH has now also abandoned this superseded case law and followed the example of the ECJ.
Companies should always consider the tax implications of establishing branches in foreign countries. The team of international tax experts at MTR Legal advises both domestic and international clients on all things tax related.
