Administrative Supreme Court rules final foreign branch losses may not be deducted

This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.

The French Administrative Supreme Court ruled on 26 April 2024 that the taxable result of a French group could not take into account the final losses of the group’s Luxembourg branch (Conseil d’Etat, n° 466062).

Background and facts of the case

A French company belonging to a tax consolidated group requested that the final losses incurred by its Luxembourg branch be included in its taxable result for 2015, the year the branch was liquidated. This claim was based on the 2005 Marks & Spencer decision by the Court of Justice of the European Union (CJEU, 13 December 2005, 446/03), extended to permanent establishments (PEs) in the 2008 Lidl Belgium decision (CJEU, 15 May 2008, 414/06).

The Luxembourg branch had participated in a joint venture created for the construction of a tunnel and had incurred losses since 2002. In 2015, following the dissolution of the joint venture, the branch sold its business before being removed from Luxembourg’s commercial register.

The French tax authorities (FTA) disallowed a deduction for the branch’s final losses from the French group’s 2015 profits. However, the Versailles Administrative Appeal Court ruled in favor of the company (9 June 2022, n° 19VE03130) and the FTA then appealed the case to the Administrative Supreme Court.

Decision of the Conseil d’Etat

The Administrative Supreme Court reversed the appeal court’s decision.

It noted that a French resident company is prevented from deducting the losses incurred by its Luxembourg PE whereas it would be able to deduct the losses of a French PE. However, the court stated that such a difference in treatment only constitutes a restriction of the freedom of establishment provided in article 49 of the Treaty on the Functioning of the European Union if it concerns objectively comparable situations.

The Luxembourg PE was exempt from tax in France pursuant to article 4 (business profits) of the France-Luxembourg tax treaty. Since this results in France effectively and completely waiving its power to tax the income of Luxembourg PEs under the treaty, the court concluded that the position of Luxembourg PEs is not objectively comparable to that of French PEs and, therefore, the French rules on the deductibility of a nonresident PE’s final losses are not contrary to the freedom of establishment.

This decision is in line with that of the CJEU issued on 22 September 2022 in the W AG case (C-538/20).

Alice de Massiac

Alice de Massiac, Partner, has developed extensive expertise in supporting major French and foreign multinational companies, both in consulting and tax controversy, anticipating the impact of the proposed recommendations in […]

Clara Maignan

She joined Deloitte Société d’Avocats (French law firm of the Deloitte network) in 2011. She is a director in the Knowledge Management department.