According to a press release dated 29 September 2011 (IP/11/1127), the European Commission has initiated the second step of the infringement procedure against Germany in an effort to require Germany to amend its legislation on rollover relief for certain assets. According to the Commission, the rules are incompatible with the freedom of establishment provisions in the Treaty of the Functioning the European Union (TFEU, which replaced the former EC Treaty) and the EEA Treaty.
Under the challenged rules, a taxpayer can avoid the taxation of capital gains derived from the sale of land, buildings and inland navigation vessels (“qualifying assets”), inter alia, if the asset sold formed part of a domestic permanent establishment (PE) for at least six years before the alienation, the gains are used to reinvest in an asset that also belongs to a domestic PE of the taxpayer and the reinvestment is made within four years following the year of the sale. It is the opinion of the European Commission that the obligation to reinvest in domestic assets discourages taxpayers from undertaking cross-border investments and, therefore, infringes the freedom of establishment principle. If Germany does not respond to the Commission’s request within two months, the Commission can refer Germany to the European Court of Justice (ECJ).
Taxpayers wishing to reinvest capital gains from the alienation of qualified assets in assets located in the EU/EEA should monitor future developments closely. If an otherwise qualifying reinvestment was made outside Germany in the past, taxpayers should ascertain whether the rollover relief still can be claimed in order to benefit from a potential (retroactive) law change or an ECJ decision upholding the European Commission’s view.
If you have any questions, please contact the authors of the article at gtln@deloitte.de or your regular Deloitte contact.
