Local tax court rules on when final PE losses become tax effective at level of head office

In a recently published decision, the local tax court of Hamburg ruled on the issue of when a loss incurred by a permanent establishment (PE), which was deemed to be final, had to be considered at the level of the German head office, i.e. in the year the loss was incurred or the year the loss had become final (case reference 6 k 147/08). A loss is generally considered final at the time it can neither be used in another assessment period nor transferred to another taxpayer. 

In the case, a taxpayer had a PE in France that incurred losses but was closed down before the tax losses expired under French domestic law so that the tax losses became final based on the principles of the European Court of Justice (ECJ) decision in the Lidl case. The local tax court of Hamburg ruled that the losses had to be considered retroactively in the year they were incurred since this was the most appropriate time to take the losses into account for German corporate income tax purposes. Interestingly, the tax court of Düsseldorf reached a different conclusion in a decision published only shortly before the Hamburg tax court’s decision (see Deloitte Tax-News). 

The tax court of Hamburg also commented on the utilization of the final losses for trade tax purposes and held that the fact that losses of a PE in another EU (or EEA) Member State were not considered for trade tax purposes was in line with EC law. The court mainly explained this by the fact that only a trade or business in Germany was subject to trade tax, so that due to this principle of territoriality, the rules in question did not result in an infringement of EC law. 

This issue likely will ultimately be decided by the Federal Tax Court (or even the ECJ) because the taxpayer has decided to appeal against the decision of the tax court of Hamburg. Taxpayers should keep their tax assessments open to be able to benefit from any future taxpayer favorable decision of the Federal Tax Court. 

If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.