Case Note on Case C- 650/16A/S Bevola and Jens W. Trock ApS v Skatteministeriet/Liu Yujie

Case Note on Case C- 650/16

A/S Bevola and Jens W. Trock ApS v Skatteministeriet/Liu Yujie 

1. Main facts: 

(1) Parties involved 

1 A/S Bevola and Jens W. Trock ApS, companies incorporated under Danish law 2 the Ministry of Finance in Denmark 

(2) Core issue: 

1 Bevola, which is seated in Denmark, closed its Finnish permanent establishment in 2009, incurring losses that could no longer be used in Finland. Bevola applied to be able to deduct those losses from its taxable income in Denmark in 2009, which was refused by Denmark authorities. Therefore, disputes arose and Bevola argued that denying the deduction in Denmark for these "final" losses violated EU law. 

(3) Danish Law 

1 General Rule (Corporate Tax Law § 8(2)): The taxable income of a Danish resident company does not include the income and expenditure attributable to its permanent establishments abroad. This means that neither the profits generated by these foreign establishments are taxed in Denmark, nor are the losses incurred by them deductible against the company's Danish taxable income. 

2 Exception Rule (Corporate Tax Law § 31A): If this option is chosen, the worldwide income and expenditure of all companies in the group including foreign companies and permanent establishments are included in the Danish tax base. However, this election is binding for a minimum period of 10 years and also means that the profits of the foreign establishments become subject to taxation in Denmark. 

(4) Arguments 

1 Bevola’s argument: The Danish rule was a restriction on the freedom of establishment. Bevola cited the Marks & Spencer case, arguing that when losses in another Member State are definitive and final, the home country must allow a deduction. The optional international joint taxation scheme was an inadequate and disproportionate solution. 

2 Danish Tax Authority: The Danish rule was justified to maintain a balanced allocation of taxing rights between Member States. Also, it preserves the coherence of the Danish tax systemwhere no deduction for foreign losses is the logical counterpart to not taxing foreign profits, and prevents the double deduction of losses.

2. The free movement of establishment is involvedinthis case 

(1) Freedom of Establishment under Article 49 of the Treaty on the Functioning of the European Union (TFEU) is involved in this case. This freedom guarantees companies the right to set up and conduct business in other EU Member States through subsidiaries, branches, or agencies, ensuring that foreign nationals are treated in the host Member State in the same way as nationals of that State. And they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation In this case, the dispute is about the the tax credit of permanent establishments setting abroad, therefore the freedomof establishment can be applied in this case. 

3. Discrimination or Restriction to cross-borderactivities 

(1) The Restriction: 

1 Danish tax law generally prohibited a Danish resident company from deducting losses incurred by a permanent establishment located in another EU Member State. However, losses froma Danish domestic permanent establishment were deductible. In such circumstances, the Danish company possessing a permanent establishment in another Member State suffers an unfavourable difference in treatment compared to a company possessing a permanent establishment in Denmark. Besides, the optional international joint taxation scheme under Corporate Tax Law § 31A shall also be examined. Under that optional scheme, a Danish company may indeed deduct from its taxable income in Denmark the losses incurred by its permanent establishment in another Member State, in the same way as losses incurred by its permanent establishments in Denmark. However, the benefit of international joint taxation is subject to twostrict conditions. First, the entire income of the group must be subject to corporation tax in Denmark. Second, the option is in principle for a minimum period of 10 years. Thus, it establishes a difference in treatment between Danish companies which possess a permanent establishment in Denmark and those whose permanent establishment is situated in another Member State. That difference in treatment is liable to make the exercise of its freedomof establishment by setting up permanent establishments in other Member States less attractive for a Danish company. 

(2) Comparability Analysis： 

1 The Court acknowledged that, in principle, a foreign PE and a domestic PE are not in a comparable situation. This is because the Member State of the Danish company does not have the power to tax the profits of the foreign PE. The rule preventing deduction of foreign losses is the symmetrical counterpart to the rule exempting foreign profits, aimed at preventing double taxation and double deduction. 

2 However, situations become comparable in specific circumstances. The Court found that the situations become comparable when the losses of the foreign PE are definitive. This occurs when: the company has exhausted all possibilities in the PE's host Member State to deduct the

losses in the current, past, or future tax periods. Or the PE has ceased its activities and no longer generates any income, eliminating any future possibility of using the losses locally. In these specific scenarios of definite losses, the justification for the different treatment disappears, and the restriction on cross-border activity becomes apparent. 

4. Justifications 

(1) The Court accepted that the Danish restriction pursued several overriding reasons in the public interest that could justify a limitation on the freedom of establishment: ①Maintenance of a balanced allocation of taxing powers between Member States: allowing companies to choose where to deduct losses would undermine the coherent allocation of taxation rights between the company's state of residence and the state where the PE is located.②Coherence of the national tax system: there is a direct link between the tax advantage and the corresponding tax levy. The Danish systemis coherent because it exempts foreign profits and, symmetrically, excludes foreign losses. Allowing a deduction for foreign losses without taxing foreign profits would break this coherence. ③Prevention of the risk of double deduction of losses: The rule aims to prevent the same loss from being deducted in both the PE's state and the company's state of residence. 

5. Proportionality 

(1) General Rule is Proportional: The Court found that the general prohibition on deducting foreign PE losses is a proportionate measure to achieve the objectives above. It is a clear and necessary rule toprotect the tax base and maintain coherence. 

(2) Exception for definitive losses is required: however, the Court ruled that applying this prohibition tolosses that have become definitive is disproportionate. Once the losses can no longer be used anywhere else, the justifications cease to be relevant. Maintaining the prohibition in such a case goes beyond what is necessary to achieve the stated objectives. 

(3) The proportional solution: therefore, EU law requires that Member States must provide an exception to the general rule. A resident company must be allowed to deduct the losses of a foreign PE if it can demonstrate that those losses are definitive according to the criteria established by the Court. This ensures the restriction is tailored and does not impose an unnecessary burden on the fundamental freedom. 

6. Conclusion 

(1) The Court finally held that Article 49 TFEU precludes national legislation that prevents a resident company from deducting losses from a foreign PE in another Member State if those losses are definitive. In this case, The Danish rule, which generally prohibits the deduction of foreign permanent establishment losses, is justified for non-final losses, in order to preserve a balanced allocation of taxing rights, maintain the coherence of the tax system, and prevent double deduction. However, the rule is disproportionate and violates EU law when the losses are final or definitive. Once the losses can no longer be used in the other Member State, the justification for the restriction disappears.