ECJ Decision “Aures Holdings”

AH is a company incorporated under the Netherland’s law, whose registered seat and place of effective management were originally located in the Netherlands. AH was a tax resident of the Netherlands (unlimited tax liability) and incurred a loss of EUR 2,792,187.00 in the financial year 2007. On 01 January 2008, AH initially set up a permanent establishment in the Czech Republic and on 01 January 2009 transferred its place of effective management to the address of the permanent establishment. In this context, AH also transferred its tax residence to the Czech Republic and applied to the Czech tax authorities for the deduction of the loss which had been incurred in the Netherlands until 2007.

In principle, the cross-border transfer of the place of effective management falls within the scope of the freedom of establishment. However, the freedom of establishment does not guarantee tax neutrality.

The ECJ thus decided that the Czech Republic is not obliged to take into account the losses incurred before the transfer of effective management due to the freedom of establishment. It is acceptable to treat companies that have suffered losses in another Member State and transferred their tax residence less favorably than companies which suffered a loss in the Member State in which they are tax resident. If situations are objectively not comparable, unequal treatment is justified. The restrictions on loss deduction serve the purpose of regulating the allocation of the power to impose taxes between the Member States and to prevent the risk of double deduction of losses. If companies have suffered losses prior to the transfer of their place of effective management, they are not comparable to companies which are tax resident in only one state and suffer a loss there.

It follows that the first-mentioned companies are successively subject to the tax jurisdiction of two Member States and therefore the risk increases that these companies might try to deduct the same losses in two different Member States.

The situation would not even be comparable if the loss was possibly a final loss. The jurisdiction on this issue concerns other constellations, namely the deduction of losses suffered by foreign permanent establishments which incurred during the tax regime of two Member States.

In the present case, the new Member State (in this case the Czech Republic) cannot be obliged to allow the deduction of losses incurred prior to the transfer of the effective administrative seat if these losses incurred in tax periods for which the new Member State did not have the tax sovereignty.

In principle, the relocation of a lossmaking company within the EU is possible, but the new Member State is allowed to exclude the possibility from claiming a tax loss incurred outside its tax jurisdiction and therefore prior to the transfer of tax residency. Thus, the decision of the ECJ takes into account the principle of territoriality. An arbitrary offsetting of losses is not possible under EU law.

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