New ruling opens up the possibility for definitive tax losses in foreign jurisdictions to be used in Denmark


On 12 June 2018 the Court of Justice of the European Union ("CJEU"), in a preliminary ruling requested by the High Court of Eastern Denmark (C-650/16), ruled in favour of the Danish company, Bevola. The ruling concerned the question of whether Bevola could deduct from its taxable income in Denmark the losses incurred by a terminated foreign permanent establishment.

Kromann Reumert's opinion

The Bevola ruling affirms the Marks & Spencer doctrine that definitive tax losses generated in foreign subsidiaries and permanent establishments can be utilized by their Danish parent company, if it is no longer possible to utilize them in the foreign jurisdiction, despite the Danish rules on international joint taxation. Hence, our recommendation to Danish com-panies is to consider whether they have incurred definitive tax losses in now-terminated foreign subsidiaries or perma-nent establishments, and if so, to file a protective claim to suspend the time-barring of their potential claim pending the ruling of the High Court of Eastern Denmark.


The tax position prior to the Bevola case

On 13 December 2005, the CJEU made a landmark ruling in the Marks and Spencer case (C-446/03), in which a British company (Marks and Spencer) was allowed to utilize tax losses from its foreign subsidiaries provided that (i) the resident subsidiary had exhausted all possibilities available to utilize the loss in its own jurisdiction and (ii) there was no possibility for the loss to be taken into account in the jurisdiction of the subsidiary by itself or via a third party.

For Danish tax purposes the Marks and Spencer ruling has been interpreted by the Danish tax authorities as non-applicable, as provisions in Danish tax law allows for an election for international joint taxation, thus ensuring that losses in foreign subsidiaries can be utilized in Denmark. Consequently, Danish companies would not have exhausted all pos-sibilities of utilizing foreign tax losses, unless they had opted for international joint taxation. To do so, however, comes with certain problems that would make it a highly burdensome choice for most international enterprises. For example:


  1. If international joint taxation is elected, it is a 10-year commitment;
  2. The election for international joint taxation will encompass all foreign entities; and
  3. To calculate the joint taxation income in Denmark, tax returns for all foreign entities will have to be filed in Den-mark (under Danish accounting principles) as well as in the local jurisdiction, which will generally require a sig-nificant additional workload.


The tax position following the Bevola case

In the Bevola case, the Danish Eastern High Court decided to refer to the CJEU by way of a preliminary question, to es-tablish whether a refusal by the Danish tax authorities to allow deduction by a Danish parent of a loss from a terminated permanent establishment in Finland qualified as a restriction of the freedom of establishment (TEUF article 49).

The CJEU found that as the tax treatment of permanent establishments of a Danish company located in Denmark is dif-ferent from the treatment of permanent establishments of a Danish company located in another Member State, such refusal would indeed restrict the freedom of establishment. The Danish government had argued that although the Danish rules constitute a restriction, the restriction would be justified by overriding reasons in the public interest such as:


  1. the need to ensure a balanced allocation of powers of taxation between Member States;
  2. the need to safeguard the coherence of the Danish tax system; and
  3. (although not explicitly relied on by the Danish Government) the need to prevent the risk of double deduction of losses.

The CJEU stated that while all of the above overriding reasons may serve as justification of the restriction in this case, there is - when taking into account that the question raised by the referring court concerns the necessity of the difference in treatment in a situation where the losses are definitive - no risk of double deduction, and the other overriding reasons would go beyond what is necessary, given that a less restrictive measure does exist (i.e. allowing for deduction of defini-tive losses in Denmark as a supplement to the current rules on joint taxation). According to the CJEU the Marks & Spencer doctrine may be applied by analogy to the losses of non-resident permanent establishments. The CJEU, then, elaborates on the definition of when a subsidiary (or permanent establishment) is to be considered to have exhausted all possibilities available to utilize the loss in its own jurisdiction if:


  1. the foreign subsidiary no longer obtains any income locally; and
  2. the foreign subsidiary has no means of utilizing the tax loss locally.

The CJEU therefore concluded that in a situation where the losses are definitive as described above, then the Danish rules would be disproportionate and would therefore constitute an unjustified restriction of the freedom of establishment.


Hence, we are awaiting the Danish Eastern High Court's decision on how to apply the CJEU's ruling in the Danish case.

We will continue to follow the development on this matter to ensure that we set the market standard.