EC Launches Tax Infringement Proceedings Against Germany

by Ulrika Lomas, Tax-News.com, Brussels

19 October 2007

The European Commission has formally requested that Germany modify its legislation on cross-border loss deduction, which the Commission considers incompatible with the principle of freedom of establishment and the free movement of capital in the EU.

Under German tax law, losses generated in Germany can be offset without restriction within the same income category and against other income categories, but the law restricts the scope for offsetting certain types of negative income from foreign sources to income in the same income category, generated in the same foreign state. The EC has argued that this represents a difference of treatment of income and leads to higher taxation.

The provision attacked by the Commission covers certain types of foreign losses, such as from permanent establishments and from the rental of property. For instance, losses from the rental of foreign property can only be offset against income from the rental of property situated in the same foreign country. The provision applies to both resident individuals and companies. In the Commission's view these tax provisions create a disadvantage, and hence an obstacle to establishment in another EU state and to the free movement of capital.

The Commission believes that its opinion is supported by the judgment of the European Court of Justice of in March 2007, in the case of Rewe Zentralfinanz.

The EC's request takes the form of a ‘reasoned opinion,’ the second step of the infringement procedure. If the relevant national legislation is not amended in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

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