The Court of Justice of the European Union (CJEU) has on the 27th February 2020 decided the above-mentioned case which concerns the transfers of tax losses between different EU member states.
Aures Holdings, a company incorporated, effectively managed and tax resident in the Netherlands, incurred substantial losses in 2007. In 2009, the company transferred its place of effective management and tax residence from the Netherlands to the Czech Republic, while retaining its registered seat in the Netherlands. After the transfer, Aures carried forward the losses incurred in the Netherlands in 2007 and claimed such losses against its corporate tax base in the Czech Republic in 2012. The Czech tax authorities refused to allow the deduction on the basis that the loss did not arise from an activity in the Czech Republic. Aures claimed the refusal constituted an infringement of its freedom of establishment in terms of Article 49 of the Treaty on the Functioning of the European Union (TFEU). Czech domestic tax law permits the carry-forward of unutilised tax losses for up to five accounting periods following the year in which they were incurred.
The CJEU determined that the Czech rule denying the deduction of pre-migration losses creates differential treatment. However, one cannot compare a scenario in which
- A company resident in one Member State that has incurred losses in that EU MS and carried them forward to be deducted against its own taxable income in that same EU MS,
- With a scenario in which a company that has transferred its tax residence to another EU Member State, having incurred losses during a tax year during which it was a tax resident in the first mentioned EU MS, without any activity in the second mentioned EU MS, importing its losses to the second EU MS and deducting such losses against chargeable income subject to tax in the second EU MS.
The Court said that the two scenarios are NOT objectively comparable. Therefore the TFEU does not preclude legislation that excludes the possibility for a company, which has transferred its place of effective management to a different EU MS and, as a result, its tax residence to that EU MS, from claiming a tax loss incurred, prior to that transfer, in another EU MS, in which it has retained its registered seat.
Maltese’s position with respect to the carry forward of losses
The CJEU’s decision in Aures confirms Malta’s position both with respect to the carry forward of losses as well as to the importation of foreign losses from another EU MS. Trading losses suffered by a taxpayer may be carried forward indefinitely to be set off against any future income and capital gains, chargeable to income tax in Malta. Furthermore, Malta’s position has always been that foreign trading losses will not be allowed as a deduction where, had the foreign loss been a foreign profit instead, such profit would not have been chargeable to tax under Maltese tax law. Malta would not have allowed the trading losses of Aures to be carried forward against Maltese chargeable income, because such loss, if it was a profit, would have been considered to be derived from foreign sources by a non-resident taxpayer, which would not have been subject to Maltese income tax. The Aures decision thus reinforces Malta’s right to refuse the importation of foreign losses where the corresponding profits would not have otherwise been brought to charge to tax in Malta.