German rule on foreign tax losses is permissible

A German policy that restricts companies from deducting losses incurred outside the country from their tax bill is permissible, the European Union's highest court said.

Lidl, a discount supermarket chain, was prevented from subtracting losses at a Luxembourg branch from its German taxes.

German officials said Lidl couldn't take the deduction because profits in Luxembourg aren't taxed in Germany under an agreement between the countries.

“The tax regime at issue in the main proceedings must be considered to be proportionate to the objectives pursued by it,” the European Court of Justice ruled today.

The case further clarifies companies' tax rights under EU rules following a precedent-setting decision by the court in 2005.

The court then decided Marks & Spencer Group Plc's foreign losses can be deducted from local tax bills in some cases.

Lidl is owned by closely held Schwarz Group of Germany.

(Published by Bloomberg 15, 2008)