1. European and international tax law
Case Lidl C-414/06 – Cross border loss relief
Sonja Leppänen

2. Background and facts
Lidl Belgium a part of Lidl and Schwarz group, and a limited partnership with its registered office in Germany, which has a permanent establishment in Luxembourg
Reference for preliminary ruling made in proceedings between Lidl Belgium GmbH & Co. KG and the Finanzamt Heilbronn
The PE had been established in Luxembourg in 1999, and it was generating losses
Lidl Belgium stated, that they should have the right to offset the generated losses in Luxembourg against its domestic profits in Germany
The reference for preliminary ruling concerns the interpretation of Articles 43 EC and 56 EC
Freedom of establishment and freedom of capital movement
The case was final on May 15, 2008

3. Legal context
The second subparagraph of the first paragraph of Article 2 of the Convention between Luxembourg and Germany defines ”permanent establishment” as ‘a fixed place of business at which the undertaking carries on all or part of its activities’.
Article 5 of the Convention
When the activities of the business are extended to another State, the income coming from those activities are taxable in the other State only in so far as it is sourced from the permanent establishment situated in the territory of that state
Income attributed to permanent establishment similar to a situation, where the permanent establishment would be independent company
Article 6 (1) of the Convention:
Participation in the management or financial structure of an undertaking of the other State

4. Legal context Article 20 of the Convention states
When the state of residence (=host state) is entitled to tax the income/capital, the other state is not allowed to tax such income/capital
Any income/capital taxable (according to proceeding articles) in the other state has to be excluded from the tax base of the residence state (unless paragraph 3 applies)
Taxes on income/capital are taxed in the residence state according to the rate applicable to the taxpayer’s total income/capital

5. European Court of Justice
The goals of the EU: Single market and freedom of establishment (Art. 49 TFEU)
Right of companies to set up branches or subsidiaries in other EU member states
German law restricts the freedom of establishment of Lidl Belgium (?)
Restriction justified, since it didn’t succeed the legitimate objectives of EC law
Principles established in the Marks and Spencer -case
When exemption method is applied, EU law doesn’t require deduction of losses in the residence state as long as such losses may be deducted in the host state in the future
Balanced allocation of taxing rights between the member states
Prevention of double dipping and ”loss shopping”

6. German-Luxembourg tax treaty
Under Germany’s double tax treaty with Luxembourg exemption method applies
Losses are not included in the tax base of the firm which has a PE in another member state or losses are temporarily included but are ”recaptured” as soon as profits arise for the PE
Taxing rights allocated to Luxembourg: Luxembourg tax rules allow taxpayer’s losses to be deducted in future periods (=Lux legislation provides Loss-Carry forward method)
justification in the restriction of freedom of establishment
Home state doesn’t have the right to tax under the treaty -> tax regime protects the symmetrical treatment of profits and losses

7. European Court of Justice
If Lidl Belgium would be allowed to decide whether to utilize losses applicable to its permanent establishment either in Germany or Luxembourg, the balanced allocation of taxing rights would be very much violated
The restriction in the Germany-Luxembourg Tax treaty proportionate -> has to attain EC law’s legitimate objectives

8. The Advocate General
Immediate offset of losses allowed, subject to recapture if the losses were used in the country of origin
Is there a ”possibility to use” the losses in the country of origin?
Similar principle should be used in cases of group relief
The scope of application of Articles 43 EC and 56 EC
Does the restriction of the freedom of establishment exist?
The two justifications mentioned earlier justify the restriction on the freedom of establishment arising from the tax treatment by the Member State in which the seat of a company is located
When it comes to the justification of the restriction of the freedom of establishment, not all three of them have to be fulfilled cumulatively

9. Sources
B E/$file/Lidl.pdf
t+15+May+08+Cross+Border+Relief+For+Utilized+Losses+Tax+Payer+Loses
ex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=751140