ECJ: Regulation on 6b provision is in breach of European law

If a taxable person sells real estate, the taxable capital gain realised can pursuant to Section 6b of the German Income Tax Act (Einkommenssteuergesetz – EStG) be transferred to a newly acquired replacement asset. In this respect, the costs of procuring the replacement asset are expensed in the amount of the profit from the sale of the real estate and as a result the taxation of the profit from the sale can be avoided.

One of the requirements for this, however, is that the replacement asset forms part of the assets of a domestic permanent establishment (Section 6b (4) No. 3 of the German Income Tax Act). This obligation to reinvest in a business asset of a domestic permanent establishment is deemed by the ECJ to be in breach of European law in its judgment of 16 April 2015 (C-591/13) handed down in the context of infringement proceedings. This is because when the profit from the sale of real estate is reinvested in an asset of a permanent establishment located in another EU Member State, it currently cannot be expensed and transferred to the replacement asset. This would lead to the immediate taxation of the profit on the sale of the real estate. Since this regulation could prevent undertakings from making investments in another EU Member State, this in the ECJ’s opinion constitutes a breach of freedom of establishment (Article 49 TFEU).

Problematic from a German point of view with respect to a reinvestment and a transfer of undisclosed reserves to a foreign permanent establishment is that the right to tax the transferred undisclosed reserves passes to the other EU Member State. Although the ECJ in principle recognises Germany’s taxation right with respect to the “transferred” profit from sale, this does not in the ECJ’s opinion justify immediate taxation in the event of a replacement investment in another EU Member State.
In adherence to its case law in the National Grid Indus case, the ECJ sees a regulation as being compliant with European law if it gives the taxable person the choice between immediately paying this tax on the profit from the sale or deferring this payment, plus interest if applicable. The legislator is now required to transpose this ECJ decision into national law and to reform Section 6b of the German Income Tax Act. This is also possible in the on-going legislative procedure regarding the German Act on the Implementation of the Federal Government’s Declaration with respect to the German Fiscal Code in line with the EU Customs Code (Protokollumsetzungsgesetz – ProtokollUmsG) (see news of 2 April 2015).

Recommendation:

Taxable persons who have already realised Section 6b replacement investments should keep their tax assessments open in order to profit from the new regulation.