In a recently published decision, the tax court of Düsseldorf ruled on the issue of when a loss incurred by a permanent establishment (PE) that was deemed to be final had to be considered at the level of the German head office, i.e. whether in the year the loss was incurred or the year the loss had become final. A loss is generally considered to be final when it can no longer be used in another assessment period or transferred to another taxpayer.
In the case, a German entity operated two loss-making PEs located in other EU Member States. Under the applicable tax treaties, the profits of the PEs were exempt from German tax. The taxpayer initially claimed a full and immediate recognition of the losses incurred in the PEs in its German tax returns. After the European Court of Justice (ECJ) issued its decision in the Lidl case (where the ECJ held that under EC law, Member States applying the exemption method to PE profits were only obliged to allow taxpayers to deduct PE losses that can be considered final), the taxpayer limited its claim to the losses that became final in later years, arguing that these losses were to be set off in the assessment period in which the losses were actually incurred. The tax court of Düsseldorf ruled against the taxpayer stating that the comments of the Federal Tax Court (BFH) in its final decision in the Lidl case are to be interpreted in a way that PE losses are to be deducted in the year the losses became final. Even though it was no longer relevant in the case, the tax court of Düsseldorf also indicated that the amount of losses to be considered was to be calculated under German law. The court did not elaborate on the question whether the losses became final in the year they expired under local law or only at the time the PE was closed down, which is another issue that has been left open by ECJ jurisprudence.
The tax court specifically allowed the taxpayer to appeal its decision to the BFH, but it is not yet known whether the taxpayer has filed an appeal.
