Global Tax Alert (News from the EU Competency Group) | 19 March 2014

EU Advocate General holds Danish recapture of taxes losses in conflict with freedom of establishment

  • Share

On 13 March 2014, the Advocate General (AG) Kokott issued her opinion in Case C-48/13, Nordea Bank Denmark. The case concerns the compatibility of a former Danish rule on the recapture of tax losses of a foreign permanent establishment (PE) with the EU principle of freedom of establishment.


A Danish tax resident bank carried out banking businesses in Sweden, Norway and Finland through branch offices. The branch offices generated tax losses which were offset against the Danish taxable income of the bank. At that time, Denmark applied a system of worldwide taxation and foreign tax credit. Following a cross-border merger, the branch offices of the Danish bank were closed and the activities were transferred to affiliated companies in the other Nordic countries. The tax losses carried forward by the branch offices could not be taken over by the acquiring companies. The transfer of the activities to the affiliated companies triggered a recapture of the tax losses that the Danish bank had previously deducted in its Danish taxable income according to former Section 33 D (5) of the Danish Tax Assessment Act.

The Danish Eastern High Court asked the Court of Justice of the European Union (CJEU) the following question:

“Are Article 49 of the TFEU (Treaty on the Functioning of the European Union), read together with Articles 541 and 31 of the EEA (European Economic Area) Agreement, read together with Article 34, to be interpreted as precluding a Member State, which allows a company situated in that State to deduct losses on an ongoing basis from a permanent establishment situated in another Member State, from making full recapture from the company of the losses arising from the permanent establishment (in so far as they are not matched with profits in future years) in the event of the permanent establishment closing down, in connection with which part of the establishment's business is transferred to an affiliated company within the group which is resident in the same State as the permanent establishment, and where it must be assumed that the possibilities for applying the losses in question have been exhausted?”

Opinion of the Advocate General

According to the AG, the rule on recapture of losses caused a hindrance to the exercise of the freedom of establishment, because the tax treatment of a foreign branch office was less favorable vis-á-vis a domestic branch office.

Denmark argued that the hindrance was justified for the following reasons: (i) the balanced allocation of taxing rights between member states, (ii) the need to ensure a coherent national tax system, and (iii) the prevention of tax avoidance.

Regarding the balanced allocation of the taxing rights, Denmark considered it to be justified to prevent a group from deducting the loss of a PE in Denmark and then transfer the PE to an affiliated company whereby subsequent profits escaped Danish taxation. In the opinion of the AG, this reason was essentially just an expression of the two other reasons put forward by Denmark.

Regarding the need to ensure a coherent national tax system, the AG argued that Denmark by extending its taxing right to foreign PEs should take into account both profits and losses. This symmetry included the fact that a transfer of the PEs to affiliated companies should be made at arm's length value. The fact that the application of the credit method could involve that Danish taxation of the profits of the PEs would be low, or fully eliminated, could, in the opinion of the AG, not be compared with the application of the exemption method. The application of the credit method thus meant that Denmark intended to exercise its taxing right and that there was a possibility that the profits of the PEs would in fact trigger Danish taxation. The purpose of the Danish rule was thus not to ensure a reasonable relationship between the inclusion of profits and losses of foreign PEs in the Danish taxable income, but to prevent tax avoidance. On this basis Denmark could not rely on the need to ensure a coherent national tax system.

Regarding the need to prevent tax avoidance, the AG agreed that there was a risk that Danish taxation could be circumvented by an internal transfer of a PE before it became profitable. However, in order to be compatible with EU law, the Danish provision should also stand the test of proportionality. In this respect the taxpayer should be given the opportunity to present evidence that the transaction was motivated by genuine business reasons. Moreover, the tax consequences should be limited to reflect the terms that would have been agreed between independent parties. The Danish tax provision did not comply with any of these requirements. First, the taxpayer was not given the opportunity to prove that a transaction was motivated by genuine business reasons. Second, it was not proportional that even a partial transfer of a PE triggered a full recapture. Third, full recapture was not a proportional measure in view of the loss of taxing rights to future profits. Hence, an arm's length transfer price for the PE would incorporate the expected future profits of the PEs.

Accordingly, the AG concluded that the restriction to the exercise of the freedom of establishment was not justified by imperative requirements in the public interest.


The opinion of the AG is relevant because it deals with the ability of member states to apply rules on recapture of losses in combination with the credit method. The Danish tax rule at stake in the case was abolished several years ago. None the less, the decision of the CJEU may be of relevance for similar Danish tax rules on recapture of foreign losses outlined in Section 31 A(10) and (11) of the Danish Corporate Tax Act, and Section 15(9) of law no. 426 of 6 June 2005.


1. Formerly Article 43 EC, read together with Article 48.

For additional information with respect to this Alert, please contact the following:

Ernst & Young P/S, Copenhagen
  • Jens Wittendorff
    +45 5158 2820
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Dr. Klaus von Brocke
    +49 89 14331 12287

EYG no. CM4273