On July 17, 2014, the Court of Justice of the European Union (CJEU) rendered its decision on the Nordea Bank case (C-48/13) which concerns Denmark’s recapture rule of tax losses incurred by a foreign permanent establishment. The CJEU held that the Danish provision constitutes a restriction of the freedom of establishment which could be deemed a justifiable restriction but was found not proportional for the objectives pursued.


Nordea Bank is a Danish company engaged in retail banking activities in Finland, Sweden and Norway through permanent establishments. Under Danish tax law resident companies took into account the profits and losses incurred by permanent establishments located abroad when determining their taxable income.

In the event of a partial or complete transfer of the activities of a foreign permanent establishment to a foreign affiliated company, Danish tax law provides that any gain made upon the transfer is to be incorporated in the taxable income of the company carrying out the transfer and that any losses from the permanent establishment previously deducted and that have not been matched by subsequent profits must be recaptured.

In the course of a restructuring, Nordea’s permanent establishments were closed and transferred to local affiliated companies. This triggered not only tax on the realized gains but also a recapture of the tax losses that the Danish head office had previously deducted from its taxable income.

The CJEU’s decision

The Court held that the Danish provisions constitute a restriction on the freedom of establishment, as Danish companies having a permanent establishment abroad were treated less favorably than a comparable domestic establishment. This was because of the recapture mechanism for losses deducted in respect of foreign permanent establishments which did not apply if establishments in Denmark are transferred in identical circumstances.

According to settled case law, a restriction on the freedom of establishment is permissible only when it relates to situations which are not objectively comparable or when justified by overriding reasons in the public interest, to the extent the restriction is appropriate to attain its objective and does not go beyond what is necessary to do so.

In its judgment, the Court noted that Demark had equated foreign permanent establishments to resident establishments by also taxing profits of foreign permanent establishments and that they were therefore comparable. This was so regardless of the fact that Denmark applies a credit method to neutralize the risk of any double taxation. The Danish Government argued that the restriction on the freedom of establishment could be justified by the need to ensure a balanced allocation of taxing rights in connection with the prevention of tax avoidance. Denmark argued that the purpose of the recapture rule is to prevent groups from offsetting losses of a permanent establishment in Denmark and escaping Danish taxation by selling, just before the permanent establishment becomes profitable, to an affiliated company abroad, making the actual recapture of losses impossible for Denmark. The Court noted that an artificial arrangement of this kind would erode the Danish company’s tax base and, thus, affect the allocation of the power to impose taxes.

The Court accepted that this could justify the restriction but considered that the Danish legislation went further than necessary to achieve this objective. In this respect, the CJEU noted that the objective of the balanced allocation of the power to impose taxes is to safeguard the symmetry between the right to tax profits and deduct losses.

According to the Court, this symmetry was maintained by the fact that losses could be offset by taxation of the profits made throughout the period when the permanent establishment belonged to the resident company and those made at the time of the permanent establishment’s transfer. However, the recapture of losses to counterbalance the loss of taxing rights of future profits went beyond what is necessary to attain the objective.

Comment KPMG Meijburg & Co

This case may also be of relevance for the Netherlands, inter alia, for similar rules on recapture of losses sustained in a foreign permanent establishment before 2012. As from 2012 the deduction of operational losses sustained in a foreign permanent establishment was abolished for corporate income tax purposes. However, the Netherlands still demands a recapture for losses that have been deducted before 2012. Such a transitional measure also applies to a specific provision on the non-application of the participation exemption with respect to losses sustained in a permanent establishment which were deducted in the years preceding the conversion into a subsidiary.

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