On October 6, 2015 the Court of Justice of the European Union (CJEU) ruled in Case C‑66/14 Finanzamt Linz versus Bundesfinanzgericht, Außenstelle Linz (parties concerned: IFN-Holding AG and IFN Beteiligungs GmbH) (ECLI:EU:C:2015:661).
· Does Article 107 TFEU …, in conjunction with Article 108(3) TFEU …, preclude a national measure under which, in the context of the taxation of a group of companies, goodwill is to be depreciated in the case where a holding is acquired in a domestic company — thereby reducing the basis of assessment for tax purposes, and hence the tax burden — whereas such depreciation of goodwill on acquisition of a holding is not permissible in other cases of income and corporation tax?
· Does Article 49 TFEU …, in conjunction with Article 54 TFEU …, preclude legal provisions of a Member State under which, in the context of the taxation of a group of companies, goodwill is to be depreciated in the case where a holding is acquired in a resident company, whereas such depreciation of goodwill may not be carried out in regard to acquisition of a holding in a non-resident corporation (in particular, a corporation established in another … Member State)?
The facts in the main proceedings and the questions referred for a preliminary ruling
· According to the order for reference, IFN Beteiligungs GmbH (‘IFN’) holds 99.71% of the shares in the capital of IFN-Holding AG (‘IFN-Holding’), which in turn has a majority holding in a number of capital companies which have limited or unlimited tax liability. In 2006 and 2007, IFN-Holdings held 100% of the shares of CEE Holding GmbH (‘CEE’), which in 2005 acquired 100% of the shares in HSF s.r.o. Slowakei (‘HSF’), a company established in Slovakia. CEE and HSF became, from 2005 and 2006 respectively, members of a group of companies within the meaning of Paragraph 9 of the Law on Corporation Tax of 1988. Following a merger between IFN-Holding and CEE, which took effect on 31 December 2007, IFN Holding assumed all of CEE’s rights and obligations in law, including its holding in HSF.
· In corporation tax returns for the years 2006 to 2010, first CEE and subsequently IFN-Holding each claimed depreciation of the goodwill in respect of that holding for the purposes of Paragraph 9(7) of the Law on Corporation Tax of 1988, equivalent in each case to a fifteenth of one-half of the purchase price (namely, EUR 5.5 million). In an annex to their corporation tax return they stated that the restriction of the depreciation of goodwill to domestic holdings in resident companies, under Paragraph 9(7) of the Law on Corporation Tax of 1988, was at variance with the freedom of establishment and hence contrary to EU law.
· In its tax notices, the Tax Office, as the fiscal authority of first instance, refused to allow that depreciation of goodwill on the ground that, under Paragraph 9(7) of the Law on Corporation Tax of 1988, only holdings in companies with unlimited tax liability were entitled to depreciation of that kind.
· Following actions brought by IFN-Holding and IFN against those notices, the Unabhängiger Finanzsenat, Außenstelle Linz annulled, by decision of 16 April 2013, the decision of the Tax Office. The Unabhängiger Finanzsenat considered that the restriction of the depreciation of goodwill to holdings in companies with unlimited tax liability under Paragraph 9(7) of the Law on Corporation Tax of 1988 was at variance with the freedom of establishment and could not be justified by any overriding reasons in the general interest. According to it, in order to ensure conformity with EU law, the depreciation of goodwill had to be extended to holdings in companies resident in another Member State.
· The Tax Office appealed against that decision before the referring court, which, in turn, asks, first, whether the depreciation of goodwill provided for under Paragraph 9(7) of the Law on Corporation Tax of 1988, is compatible with Articles 107 TFEU and 108(3) TFEU. It considers that that depreciation creates an advantage for the beneficiary but questions whether that advantage must be regarded as favouring certain undertakings or the production of certain goods.
· Second, the referring court questions the compatibility of the depreciation of goodwill, under Paragraph 9(7) of the Law on Corporation Tax of 1988 with Article 49 TFEU and Article 54 TFEU. It wishes to know whether that measure, which it considers to be a restriction on the freedom of establishment, may nevertheless be justified either on the ground that it relates to situations that are not objectively comparable or by an overriding reason in the general interest.
· As regards the Tax Office’s argument that the situation of resident companies and that of non-resident companies which are, in both cases, members of a group of companies are not comparable inasmuch as, for resident companies, the result (profits and losses) is attributed in full to the ultimate holding company, whereas, for non-resident companies, only losses are attributed and, moreover, only in proportion to the size of the holding, the referring court asks whether the allowance of, or the refusal to allow the depreciation of goodwill is connected to that difference in situation between the two categories of companies, which are members of a group of companies. In the context of a group of companies, goodwill can be depreciated in respect of holdings regardless of whether the subsidiary makes a profit or incurs a loss and also regardless of whether or not the value of the holding has changed.
· The referring court also observes that the depreciation of goodwill has the effect of reducing the book value of the holding for tax purposes, as a result of which the taxable capital gain on disposal is higher if the holding is subsequently disposed of. However, strategic holdings are normally held for the long term and even if the holding is sold on, the depreciation of goodwill will in any case give the parent company a cash-flow advantage, with the result that its situation on acquiring a holding in a resident company is more favourable than on acquiring a holding in a subsidiary established in another Member State.
· Regarding the Tax Office’s argument that there are no obstacles to the freedom of establishment relating to international inter-company holdings for which the option to have the holding taken into account for tax purposes, provided for in Paragraph 10(3) of the Law on Corporation Tax of 1988, has not been exercised, the referring court states that, the taxable entity can, by exercising that option, which is exercisable only once, choose between the profits and losses resulting from the disposal of the holding, on the one hand, being tax neutral, or, on the other hand, being taken into account for tax purposes. The referring court notes, however, that, even if that option to have taken into account for tax purposes is exercised, the depreciate of goodwill would not be permissible in respect of a holding in a non-resident company.
· In those circumstances, the Verwaltungsgerichtshof (Administrative Court) decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
(1) Does Article 107 TFEU …, in conjunction with Article 108(3) TFEU …, preclude a national measure under which, in the context of the taxation of a group of companies, goodwill is to be depreciated in the case where a holding is acquired in a domestic company — thereby reducing the basis of assessment for tax purposes, and hence the tax burden — whereas such depreciation of goodwill on acquisition of a holding is not permissible in other cases of income and corporation taks?
(2) Does Article 49 TFEU …, in conjunction with Article 54 TFEU …, preclude legal provisions of a Member State under which, in the context of the taxation of a group of companies, goodwill is to be depreciated in the case where a holding is acquired in a resident company, whereas such depreciation of goodwill may not be carried out in regard to acquisition of a holding in a non-resident corporation (in particular, a corporation established in another … Member State)?
The CJEU ruled as follows:
Article 49 TFEU precludes legislation of a Member State, such as that at issue in the main proceedings, which, in the context of the taxation of a group of companies, allows a parent company, in the case of the acquisition of a holding in a resident company which becomes a member of such a group, to depreciate the goodwill up to a maximum of 50% of the purchase price of the holding, while such depreciation is prohibited in the case of the acquisition of a holding in a non-resident company.
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Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).
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