How does the CJEU's case law on cross-border loss relief apply to cross-border mergers and divisions?

One of the unaddressed issues is whether (under which circumstances) the Member State of the receiving company in a cross-border merger must ‘import’ the tax losses of the transferring company, and allow these losses to be deducted from domestic profits. In the A Oy case (C-123/11), the CJEU took the view that such obligation in principle exists under primary EU law for those tax losses of the transferring company that are ‘final’ within the meaning of its Marks & Spencer judgment (C-446/03). Although, therefore, the CJEU has in principle left the door open for ‘final’ losses to be relieved in the Member State of the receiving company, it is expected that the merely factual approach to the ‘final loss’ concept followed by the CJEU in Commission v. UK (also knows as Marks & Spencer II) (C-172/13) will make it difficult to claim cross-border loss relief in a cross-border merger context. In the author’s view, the strictly factual approach to ‘final losses’ is unsatisfactory, particularly if applied to cross-border mergers and divisions.

In addition, a cross-border merger can have an important negative impact on the possibility to claim cross-border loss relief because of the ‘recapture’ rule of Article 10(1) paragraph 2 of the Merger Directive: if the tax legislation of the Member State of the transferring company provides that permanent establishment losses can be offset against taxable profits of the head office, then the ‘recapture’ rule allows such previously deducted losses to be reinstated in the taxable profits of the transferring company. Although, in Timac Agro (C-388/14), the CJEU held that the recapture rule under German legislation (‘exemption’ State) is a proportionate measure, if applied in the context of a sale of a permanent establishment, caution is required, in the author’s view, in drawing conclusions for cross-border merger cases. Although the Merger Directive explicitly confirms that a recapture of the tax losses is allowed, arguably, the recapture mechanism constitutes a disproportionate restriction to the freedom of establishment, assuming it interpreted as allowing an immediate recapture and an immediate recovery of the tax upon the merger or division. A more proportionate approach could be to defer (the recovery of the tax resulting from) the recapture until the moment and to the extent that the permanent establishment transferred in the merger actually makes profits, or to offer the transferring company the possibility of staggered payments.


Click here to consult the article in EC Tax Review 2016-3, p. 132-145, 20 July 2016.