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Germany: German roll-over relief rules contrary to EU law

In its judgement of 16 April 2015 the European Court of Justice held that the German tax legislation, which allows that capital gains realised from the sale of certain business assets (mostly land and buildings) may be ‘rolled-over’ to reinvestments into new assets if both the sold and the newly purchased assets belong to a German permanent establishment, violates the freedom of establishment.

Under the current German legislation, businesses may defer the tax charge on capital gains realised from the sale of certain business assets by deducting the gain from the cost of a replacement asset belonging to a German permanent establishment. This reduces the amortisation basis of the replacement. A similar reinvestment carried out for the purpose of acquiring replacement assets belonging to a permanent establishment of the taxable person located within the territory of another Member State leads, by contrast, to the immediate taxation of those capital gains.

This difference in treatment concerning the deferral of taxation of the capital gains is suitable for a cash-flow disadvantage for a taxable person wishing to reinvest those capital gains in order to acquire replacement assets intended for a permanent establishment located within the territory of another Member State. Therefore, the difference is liable to make reinvestment effected outside Germany less attractive than reinvestment effected within Germany and could deter a taxable person established in Germany from carrying out its activities through a permanent establishment outside of Germany. This restriction occurs only due to an objective of a purely economic nature and cannot justify a restriction on the freedom of establishment.

The reaction of the German legislator remains to be seen. A complete abolition of the relevant tax legislation as well as its widening on other Member States is possible.

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