Today, the European Commission decided to refer Germany to the Court of Justice of the European Union for having failed to remedy the infringement of the free movement of capital ( Article 63 TFEU and Article 40 of the EEA Agreement ) due to its discriminatory tax treatment of reinvested capital gains upon sale of real estate located in Germany. Germany grants a deferral of taxation for reinvested capital gains made on the sale of real estate located in Germany provided that the real estate has been attributed to the fixed assets of a domestic permanent establishment (Betriebsstätte in Deutschland) for an uninterrupted period of at least 6 years. Corporations established in Germany, even without a business activity therein, are deemed to have such a permanent establishment at their place of management (i.e. in Germany). Comparable corporations established in other EU/EEA Member States are deemed not to have such permanent establishments in Germany. Hence, they are denied such tax deferral on reinvested capital gains from the alienation of German real estate.
The Commission sent a reasoned opinion to Germany in November 2019 and actively engaged in further discussions with Germany to resolve the issue. However, the Commission considers that efforts by the authorities have, to date, been insufficient and is therefore referring Germany to the Court of Justice of the European Union.
Background
The German Income Tax Act provides an option to defer the taxation of realised capital gains of certain assets by enabling a corporation to deduct the capital gains from the acquisition costs of new assets purchased in the following years. This deferral amounts to a tax benefit. A non-resident corporation from other EU/EEA States cannot rely on this provision of the German Income Tax Act if it has assets that are taxable in Germany, such as real estate property, unless these assets are allocated to a permanent establishment in Germany. A German corporation in a similar situation, e.g. a company holding only real estate property and not having a permanent establishment in Germany, can use this beneficial deferral of taxation since it is deemed to have such a permanent establishment at its place of management (i.e. in Germany).
This difference in treatment constitutes a restriction of the free movement of capital ( Article 63 TFEU and Article 40 of the EEA Agreement ) for which the Commission has not found any valid justifications.
With regard to the requirement of reinvestment of capital gains, the Commission notes that the former rule in German tax law of allocating newly acquired fixed assets to a permanent establishment located in Germany was already considered by the Court of Justice of the European Union as contrary to EU law (see C-591/13, Commission v. Germany).
