According to a press release issued on 30 September 2010, the European Commission has formally requested that Germany allow companies established under the laws of another EU/EEA Member State, but having their place of management and control in Germany, to join a tax group (Organschaft) with a German parent company (case number 2008/4909).
Under the Organschaft rules, the controlled company (unlike the head of the tax group) currently must have both its registered seat and its place of management and control in Germany. A company that is formed in another country and that has relocated its place of management to Germany cannot form a fiscal unity with another German company even though it becomes a German tax resident (and thus “fully liable to tax”) under domestic law and under the tiebreaker rule of an applicable tax treaty. According to the Commission, this requirement discriminates against dual resident companies whose registered office is in another EU/EEA Member State.
The European Commission has taken the position that Germany has failed to fulfill its obligations under the freedom of establishment provisions in article 49 TFEU (Treaty on the Functioning of the European Union) and article 36 of the EEA Agreement, because the possibility to pool profits and losses within a group of companies is viewed as a beneficial tax regime that should be open to all companies that are fully liable to tax in Germany.
The press release does not specifically refer to companies established under German law with a place of management and control in another EU/EEA Member State. As Germany has concluded tax treaties with nearly all EU/EEA Member states that contain a tiebreaker rule under which such a company would be deemed to be resident in the state where the place of management and control is situated, it can be derived from the Commission’s reasoning that such a company may not benefit from the infringement procedure as it would not be fully liable to tax in Germany.
The Commission further points out in the press release that the infringement procedure does not cover cross-border loss relief, i.e. the question whether a German Organschaft parent company can deduct losses incurred in a non-resident EU/EEA subsidiary.
It remains to be seen whether Germany can continue to apply the additional Organschaft requirement that a profit and loss pooling agreement be concluded between the companies forming a tax group because it is questionable whether a company with its registered seat in another EU /EEA Member State can enter into such an agreement at all.
The reasoned opinion is the second step in an infringement procedure. If Germany fails to comply with the Commission’s request within three months, the Commission may bring the case before the Court of Justice of the European Union (ECJ).
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