Case Note: C-405/18 AURES HOLDINGS a.s v ODVOLACI FINANCNI REDITELSTVI COURT OF JUSTICE OF THE EU, 4TH CHAMBER February 2020/ ABAHO ALBERT

Case Note: C-405/18 AURES  HOLDINGS a.s v ODVOLACI  FINANCNI REDITELSTVI 

COURT OF JUSTICE OF THE EU, 4^TH CHAMBER February 2020/ ABAHO ALBERT 

Aures Holdings a.s was a Dutch resident; that is to say, was both incorporated and had a registered  in the Netherlands as well as the place of effective management. In 2007, Aures Holdings a.s incurred a tax loss amounting to EUR 2,792,187 as assessed by the Dutch tax authorities.  

On the 1^st of January 2009, Aures Holdings a.s transferred its place of effective management from  the Netherlands to the Czech Republic hence changing its tax residency yet still retained its  registered seat in Amsterdam and remained governed by the Dutch law. Aures Holdings a.s then  filed its Czech tax return for the 2012 tax year and sought to deduct the 2007 loss from its 2012  Czech taxable income. The Czech authorities refused citing paragraph 38n of Law No. 586/1992  on income tax, which allows deduction only of losses determined under Czech legislation and  arising from activities within Czech territory. In addition, Czech law does not allow transfer of  losses incurred during prior foreign tax residency.  

Aures Holdings a.s challenged this refusal, arguing that it violated Article 49 TFEU on freedom  of establishment. After lower courts dismissed the claim, the Supreme Administrative Court  referred questions to the Court of Justice asking whether freedom of establishment applies to such  transfer and whether Czech legislation is compatible with European Union (EU) law.  

a) Fundamental Freedom Involved  

The applicable fundamental freedom is freedom of establishment under Article 49 TFEU, read  together with Article 54 TFEU. Article 49 guarantees the right to establish business in another EU  member state under the same conditions as nationals of that state. Article 54 on the other hand,  extends this protection to entities formed under member state law having their registered seat,  central administration or principal place of business within the EU.  

The key question was whether a company transferring only its place of effective management  while keeping its registered seat could invoke Article 49 TFEU. Court of Justice said yes,  confirming that Article 49 extends to companies transferring their place of effective management  without affecting their status as companies of the first member state. The Court relied on its  previous decision in the National Grid Industries BV (C-371/10) case 

It is important to note, that the Court of Justice of the EU emphasized that this protection work in  two ways; such a company may rely on Article 49 TFEU against tax consequences in the member  state of origin and to challenge treatment in the host member state. Therefore, Aures Holdings a.s  could use freedom of establishment to challenge the Czech’s refusal. 

b) Discrimination or Restriction  

✔ Differential Treatment 

The Court of Justice of the EU identified differential treatment in this case. Under the Czech law,  resident companies that incur tax losses may carry forward those losses and deduct them from  taxable profits up to five subsequent accounting periods. However, Aures Holdings a.s was denied  this benefit for its 2007 loss incurred during Dutch residency. This means that a company that had  always been a Czech resident with similar losses would enjoy full loss carry forward rights.  

The Court of Justice noted that this difference might discourage a company from transferring its  place of effective management to another member state thereby creating a potential restriction on  freedom of establishment.  

✔ Comparability Analysis 

Differential treatment is allowed only if it relates to situations that are not objectively comparable  or if justified by overriding public interest reasons. The Court of Justice of the EU emphasized that  comparability must be examined based on the purpose of the national provisions. These are;  

⮚ Preserving the allocation of taxing rights between member states  

⮚ Preventing double deduction of losses.  

The Court held that the company which transferred its taxing residency having incurred a loss  during a prior tax year when it was resident in another member state is not in a comparable situation  to a company incurring losses domestically.  

The Court’s reasoning focused on successful tax jurisdiction. A company transferring residency is  subject successively to two member states’ tax jurisdiction. That is to say; the origin state for the  year the loss is incurred and the host state for the year deduction is claimed. Where the host state  has no tax jurisdiction over the tax year when the loss arose, the situations are not comparable.  The Czech Republic had no taxing jurisdiction over Aures Holdings’ 2007 activities, hence Aures  Holdings a.s fell exclusively under Dutch jurisdiction at that time.  

The Court also noted that successive tax jurisdiction creates greater risk of losses being counted  twice. Without territorial and time limitations, Aures Holdings a.s could potentially claim the same  loss in both the Netherlands and the Czech Republic and this would be unfair to both tax systems.  

✔ “Final Losses” Doctrine does not apply. 

The United Kingdom government and the EU Commission suggested that comparability should  depend on whether the loss was “final”; that is to say, whether Aures Holdings a.s could still deduct  it in the Netherlands. This argument relied on the Bevola and Jens W. Trock (C-650/16) case. However, the court rejected this extension. It distinguished Bevola case on the fact that that case  dealt with resident companies seeking to deduct losses of non-resident permanent establishment.  In this situation a company and its branch exist in different countries at the same time yet in Aures  Holdings’ case, the loss was incurred in 2007 when both its seat and effective management were 

in the Netherlands, before any Czech establishments existed. This was a complete transfer of tax  residency not a cross-border permanent establishment relationship.  

The court also emphasized that extending Bevola case to transferred residency would contradict  the National Grid Industries exit taxation approach which allows the origin state to tax unrealized  capital gains when a company transfers out. This creates symmetry; if a departing company can  be taxed on unrealized gain at exit, an arriving company cannot import losses from before it  arrived.  

The Court of Justice of the EU concluded the situations are not comparable for purposes of  preserving taxing power allocation and preventing double deduction.  

c) Justification 

Although the Court of Justice found no comparability and therefore did not fully examine  justifications, the judgement identified two legitimate grounds that would have applied if  comparability had been found.  

✔ Preserving the balance of allocation of taxing powers between member states 

This represents core member state sovereignty in direct taxation. Each member state must be able  to define its tax base and exercise jurisdiction only over activities and periods within its scope.  The Court of Justice explained that where the host state has no tax jurisdiction over the year the  loss arose, it cannot be expected to take fiscal responsibility for that loss. Requiring the Czech  Republic to accept losses under Dutch law for 2007 where Aures Holdings a.s was exclusively  Dutch resident, would fundamentally undermine how taxing powers are allocated between  countries.  

✔ Preventing double deduction of losses.  

The Court of Justice recognized this as legitimate. When a company transfers residency, it falls  within two states’ jurisdictions, creating genuine risk the same loss could be claimed twice; once  in the Netherlands and again in the Czech Republic. Without limitations, companies could exploit  having been under two different tax systems, obtaining double benefits that neither country  intended to give.  

d) Proportionality  

The Court of Justice of the EU found no comparability, so it did not conduct explicit  proportionality analysis. However, the Czech measure would likely satisfy proportionality’s three  requirements if comparability had been found. 

✔ Suitability: By restricting deductions to losses incurred during Czech residency, it  implements the principle that each state takes responsibility only for years within its  jurisdictions and eliminates the possibility of double deduction. 

✔ Necessity: The measure appeared necessary since there are no equally effective but less  restrictive alternatives. The court implicitly accepted this by aligning with National Grid  Industries exit taxation principles, establishing balance; just as a state may tax unrealized  gain when a company leaves, a state need not to assume tax benefits from periods before a  company arrived. Any alternative allowing automatic loss transfers would compromise  either taxing power allocation or double deduction prevention.  

✔ Proportion in the strict sense: The restriction achieves fair balance between freedom of  establishment and member states’ fiscal sovereignty. The rule applies objective principle  based on time-based jurisdiction without discrimination based on nationality. It treats all  companies transferring into Czech residency the same way, regardless of where they come  from. It imposes no penalty beyond the natural consequences of changing tax jurisdiction.  The Court of Justice of the EU noted that freedom of establishment does not guarantee tax  neutrality when companies move between member states with different tax systems.  

References 

Case C-405/18, AURES Holdings a.s. v Odvolací finanční ředitelství, ECLI:EU:C:2020:127  (CJEU 27 Feb 2020). 

Case C-371/10, National Grid Indus BV, ECLI:EU:C:2011:785 (CJEU 29 Nov 2011). Case C-650/16, Bevola and Jens W. Trock, ECLI:EU:C:2018:424 (CJEU 7 Jun 2018). 

Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/47,  arts 49, 54. 

Terra, B.J.M. & Wattel, P.J. (2012). European Tax Law (6th ed.). Kluwer Law International