German Tax Regulations on Hidden Reserves come before the EuGH

The German tax regulations that govern the reinvestment of hidden reserves cannot be reconciled with European law. This at least is the opinion of the European Commission, which has therefore sued Germany in the European Court of Justice (EuGH). The suit filed before the EuGH is the final step in treaty violation proceedings.

Taxpayers in Germany are able to transfer hidden reserves from assets that are being disposed of to newly acquired assets – without paying tax. This is possible by deducting the gain on disposal from the purchase price of the newly acquired asset in the year of sale. Alternatively the taxpayer can establish a reserve that reduces profits, transferring the reserve to assets acquired in subsequent financial years.

The EU Commission protects the free movement of capital and, in this role, objects to the fact that the newly acquired asset has to be part of the long-term assets of a German operating establishment if the taxpayer wants to benefit from the tax exemption. On the other hand, the tax exemption under German tax law is not available when the hidden reserve is reinvested in a foreign operating establishment – which constitutes discrimination from the perspective of the EU Commission.

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