Right to deduct foreign losses – the Nordea case

In several decisions, the European Court of Justice has established that denying a company which is resident in one EU member state the right to deduct losses realised by a subsidiary or a branch resident in another member state is in contravention of the right to freedom of establishment of the EC Treaty.

The first decision (Marks & Spencer) dates back to 2005 and concerned subsidiaries’ losses. The decision was followed up in 2006 in the Lidl case, which concerned branches’ losses. A series of other decisions concern the same issue.

Plesner conducted and won the Nordea case

Most recently, the European Court of Justice, in its judgment of 17 July 2014 in favour of Nordea, ruled that the provision on full recapture of foreign branches’ losses set out in section 33D(5) of the former Danish Tax Assessment Act is in contravention of the right to freedom of establishment.

The Danish Ministry of Taxation has subsequently acknowledged and admitted the claim before the Eastern Division of the Danish High Court.

The Danish Customs and Tax Administration (SKAT) has issued guidelines stating that reopening is possible for other taxpayers as from the 2003 income year. 

According to the guidelines, the judgment rendered by the European Court of Justice has an immediate effect on a situation in which a Danish company, due to an intragroup transfer of a branch’s activities, has been taxed again on the loss previously deducted from the branch pursuant to section 33D(5) of the Danish Tax Assessment Act.

Moreover, the judgment rendered by the European Court of Justice has an effect on recapture under so-called shadow joint taxation pursuant to section 15(9) of Act No. 426 of 6 June 2005 taking place with reference to section 33D(5) of the former Danish Tax Assessment Act. In both situations, SKAT is of the opinion that the recapture is to exclusively correspond to the value of the branches at the time of transfer to the consolidated enterprises.

This has most recently been followed up by the Danish Ministry of Taxation, who submitted a Bill for public consultation on 5 October 2015. For instance, the Bill proposes an amendment to the rules on shadow joint taxation as a result of the judgment.

Plesner is conducting a series of cases on reopening

Plesner is of the opinion that SKAT’s guideline is far too restrictive.

In our view, the decision by the European Court of Justice in the Nordea case is also of significance to the rules on full recapture of foreign subsidiaries’ losses set out in section 33E of the former Danish Tax Assessment Act.

This being the case, we are conducting a series of cases involving the reopening of the assessment of Danish parent companies’ taxable income with a view to reduction of the recapture of foreign subsidiaries’ losses previously made by SKAT. 

Companies who recaptured in full foreign branches’ or subsidiaries’ losses for the income year 2003 or subsequent years should, as soon as possible, apply for reopening of their income assessment. 

See also EU tax litigation

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