Greece aligns rules on limited deductibility of foreign losses

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The Greek tax authorities recently recognized the right of Greek companies to use the losses of their permanent establishment (branch) located in an EU / EEA country and to offset them with the profits made in Greece, at the time they incur.

This position, adopted with Circular 2100/2021, constitutes a positive development for Greek companies operating abroad through a branch, and will be assessed by the companies concerned on the basis of the specific facts of each case.

Until May 2021, losses reported at a foreign branch based in the EU / EEA could be used by the Greek parent company, provided that the branch ceased operations. Thus, the loss could be considered ‘final’.

Under the previous regime – in accordance with the guidelines provided by article 27, paragraph 4, of the Greek Income Tax Code (GITC), by virtue of circulars 1088/2016 and 1200/2016 – losses suffered as a result of the activities operations of a branch located in an EU / EEA country, could not be used to offset profits of Greek origin, if the foreign branch remained operational.

The rationale was that the latter had the right to use the losses, applicable under the terms and conditions of his country of establishment. Only “definitive” losses due to the termination of a foreign branch could be transferred to Greece for use, in the event of:

  • No deduction of losses in the country of establishment of the branch; and
  • Exhaustion of the possibilities available for the use of losses abroad.

The taxpayer had the burden of proving that the above conditions were met.

In July 2019, the European Commission (EC) sent its opinion to the Greek authorities [reasoned opinion C (2019) 4841 Final], declaring that the above rule is contrary to EU law on freedom of establishment, in accordance with Article 49 of the Treaty on the Functioning of the European Union.

The EC considers that the tax treatment of losses from foreign branches in accordance with Circular 1200/2016 of the Greek tax administration does not comply with EU law, on the grounds that it provides a restrictive interpretation of Article 27, paragraph 4, of the GITC, resulting in the non-use of losses incurred in an EU / EEA country, through a branch established there.

In addition, the interpretation provided by the said circular differentiates the tax treatment with regard to the recognition of tax losses, between Greek resident taxpayers and Greek resident taxpayers having at least part of their businesses established in other countries of the ‘EU / EEA. In essence, while corporate profits from the country and those from another EU / EEA state are both subject to tax in Greece, the treatment of losses incurred abroad is limited.

It was further decided that the need to avoid double deduction of losses relates to cases where, in order to avoid double taxation, a country uses the method of exempting income from foreign branches, and not the method. imputation. It should be noted that the raison d’être of the “final” test was to prevent the double deduction of losses. Regarding the tax paid abroad, Greece generally applies the tax credit method, which states that foreign income is also taxed in Greece and that the tax paid abroad for such income is charged to national tax.

Therefore, the EC concluded that, since Greece applies the tax credit method, no risk of double deduction of losses exists. Circular 2100/2021 followed the EC opinion and the Greek tax administration aligned itself with EU law.

The direct impact of this development is that Greek companies which incur expenses abroad through a branch established there, now have the right to use these losses when they incur them and to pay them back. offset them with the profits made in Greece, while the “definitive” criterion has now been abolished.

In order for Greek companies to be eligible for the use of these losses, they must be tracked separately by country in the books of the Greek entity, so that their origin is easily identifiable (already a prerequisite).

In conclusion, the above change addresses the issue of the deductibility of losses incurred abroad through a branch, for Greek companies, in accordance with EU law. However, it remains to be clarified whether the above provisions refer to tax or accounting losses generated by a branch established in an EU / EEA country.

Eirini Theodoropoulou

Lawyer, EY Greece

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