Transfer of tax residency within EU does not have to be tax neutral

AURES Holdings a.s. was incorporated under the laws of the Netherlands and originally had its registered office and place of effective management in the Netherlands. Subsequently, it transferred its place of effective management to the Czech Republic, becoming a Czech tax resident. After the transfer, the company in its Czech tax return claimed losses that had been incurred before the change of the tax residency. The tax administrator did not accept this approach: in their opinion, the Income Tax Act allows assuming tax losses solely within defined cross-border transactions governed by the transposed EU directive on the common system of taxation applicable to mergers.   

Confirming its previous decisions, the CJEU stated that while the transfer of the place of effective management within the EU is covered by EU law, protecting the freedom of establishment, EU law does not guarantee that a transfer of a place of effective management from one member state to another will be tax neutral. According to the CJEU, the freedom of establishment cannot be understood as meaning that a member state is required to draw up its tax rules on the basis of those of another member state. The CJEU thus held that Czech legislation is not contrary to the freedom of establishment and EU law.

Following the CJEU answers, the SAC ruled that neither national nor EU legislation allows entities from another member state to claim tax losses incurred in another member state solely upon the relocation of the place of their effective management. Under the conditions stipulated by the Income Tax Act, tax losses incurred in another member state may only be claimed in cases covered by the implemented EU directive on the common taxation applicable to mergers. This means that in cases involving only the transfer of the place of effective management into the CR, taxpayers cannot claim tax losses incurred in another member state.