CASE NOTE — CJEU, C-28/17, NN A/S v Skatteministeriet Bao, Xuan

CASE NOTE — CJEU, C-28/17, NN A/S v Skatteministeriet 

Bao, Xuan 

Facts 

NN A/S is the parent company of a Danish tax group. Among the entities in the group were  two Swedish subsidiaries, each operating a Danish permanent establishment. The two branches— referred to in the referring court’s description as Branch B and Branch C—were merged in 2008,  with Branch B being transferred to the Swedish company that owned Branch C. The result of the  restructuring was the creation of a single Danish permanent establishment, known as Branch A. 

The transaction was treated differently under Swedish and Danish tax law. In Sweden, the  merger qualified as a tax-neutral restructuring, meaning that the goodwill transferred from Branch  B to Branch A could not be amortized. In Denmark, by contrast, the merger was treated as a transfer  of assets at market value. This allowed Branch A to amortize the acquisition cost of the goodwill,  generating a negative taxable result for the 2008 year. 

NN A/S sought to include that loss in the consolidated tax base under the Danish group taxation  regime. Danish law permits the losses of Danish resident companies and the losses of Danish  permanent establishments of Danish companies to enter into domestic group taxation. Losses  incurred by the Danish permanent establishment of a non-resident company, however, are excluded  unless the group elects into Denmark’s international joint taxation system, a regime that requires  worldwide consolidation and is binding for a ten-year period. NN A/S had not opted for this system. 

The Danish tax authority refused the requested set-off, reasoning that the loss incurred by  Branch A could be deducted, at least in principle, in Sweden by the Swedish company to which the  branch belonged. NN appealed the decision, and the Østre Landsret referred a question to the Court  of Justice on whether such legislation was compatible with Article 49 TFEU. 

Legal Issue 

The issue was whether the freedom of establishment precludes the Danish legislation  concerning group taxation, pursuant to which resident companies in a group are permitted to deduct,  from their overall profits, the losses of a permanent establishment situated in Denmark, in  comparison with the situation where losses incurred by a permanent establishment situated in  Denmark but belonging to a non-resident subsidiary of the group are not permitted to be deducted. 

Court’s Decision 

Discrimination 

The Court first examined whether the national legislation restricted the freedom of  establishment. It observed that a Danish company operating through a Danish permanent  establishment could have its losses included in group taxation without limitation, whereas the same  loss would not be deductible if incurred by a Danish permanent establishment belonging to a  Swedish company. The legislation therefore treated cross-border situations less favorably than  purely domestic ones. The Court reiterated its established case law that measures which make the  exercise of cross-border activity less attractive constitute a restriction on the freedom of 

establishment, even where the legislation does not explicitly discriminate on the basis of the place  of residence. 

On this basis, the Court concluded that the Danish legislation constituted a restriction within  the meaning of Article 49 TFEU. 

Comparability 

The Court then assessed whether the situations compared were objectively comparable. It  emphasised that comparability must be examined in light of the aim pursued by the national  legislation. Denmark argued that the legislation aimed to prevent the double deduction of losses.  From this perspective, a domestic company with a Danish permanent establishment and a non resident company with a Danish permanent establishment are comparable only where the loss  incurred by the latter is not deductible in its State of residence. 

The Court accepted this approach. It noted that, according to the findings of the referring court,  the Swedish tax treatment of the restructuring meant that the goodwill transferred to Branch A could  not be depreciated in Sweden. If this were correct, then the loss incurred by Branch A would not be  deductible in Sweden. In such circumstances, the domestic and cross-border situations must be  treated as objectively comparable for the purpose of Denmark’s aim of preventing double deduction. 

The Court therefore held that comparability existed, subject to verification of the factual  position by the national court. 

Justifications 

The Court then assessed whether the restriction could be justified. Denmark relied on two  arguments. 

The first was the need to safeguard a balanced allocation of taxing powers between Member  States. The Court rejected this justification. It reasoned that granting NN A/S a deduction in  Denmark in circumstances where Sweden offered no corresponding deduction would not jeopardise  the allocation of taxing powers. The loss would be recognised only once, and the tax base of neither  State would be eroded in favour of the other. The balanced allocation justification therefore did not  apply. 

The second justification concerned the prevention of double deduction. The Court confirmed  that preventing a loss from being deducted twice is a legitimate objective and can justify a restriction  on the freedom of establishment. However, the Court held that the Danish legislation went beyond  what was necessary to achieve that objective. The legislation operated as an absolute exclusion for  losses incurred by Danish permanent establishments of non-resident companies, unless the taxpayer  entered into international joint taxation. It applied even where the loss could not actually be deducted  in the State of residence. In such cases, the legislation deprived the taxpayer of any possibility of  securing relief for the loss in either Member State. 

Proportionality 

The Court concluded that the absolute and automatic exclusion imposed by Danish law  exceeded what was necessary to prevent double deduction. Less restrictive mechanisms were  available, such as requiring taxpayers to demonstrate that the loss was not deductible in the State of  residence, or providing for recapture if the loss were subsequently used abroad. Because Denmark’s  rule provided no such safeguards and risked leaving the loss permanently unused, it failed to satisfy 

the proportionality requirement. 

Holding 

The Court held that Article 49 TFEU must be interpreted as precluding Danish legislation that  prevents a resident parent company from deducting losses incurred by the Danish permanent  establishment of a company resident in another Member State, where those losses cannot be  deducted in that other Member State. It is for the national court to verify whether, under Swedish  law, the loss in question could not be deducted by the Swedish company.