Cross-Border Loss Relief in the EU: Implications of Recent Developments in Germany Regarding Outbound Permanent Establishments

Abstract

Even though the European Court of Justice (ECJ) had been forming the basic framework of cross-border relief of final losses in the EU, the issue was widely disputed among commentators. For this reason, the German Federal Finance Court (BFH) in 2010 had been given the chance to further concretize the concept of 'final losses'. The primary focus of the present article is to illustrate the BFH's ruling as well as to extract possible implications including tax planning opportunities. Implications contain comments on the criteria to constitute a final loss, since the BFH decided to differentiate between legal and de facto reasons. Once a loss has to be considered final, the question has to be answered when it is to be relieved (retroactive versus shifted approach). Eventually the authors discuss the matter on whether the concept of cross-border loss relief has to be applied to taxes following the principle of territoriality. The latter question is of utmost interest, as the BFH approved to deduct final losses not only from the domestic (corporate) income tax base but also from the German trade tax base.