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Greece aligns rules regarding limited deductibility of foreign losses

Eirini Theodoropoulou of EY Greece considers the rules regarding the deductibility of losses incurred abroad through a branch, for Greek companies.

The Greek tax administration recently acknowledged the right of Greek businesses to utilise losses of a permanent establishment (branch) of theirs located in an EU/EEA country, and offset them against profits incurred in Greece, at the time they incur. 

This stance, adopted with Circular 2100/2021, constitutes a positive development for Greek companies conducting business abroad through a branch, and will be evaluated by the affected companies upon the specific facts of each case.

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

Under the previous regime – per 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 incurred from the business activities of a branch located in an EU/EEA country, could not be used for offsetting Greek-sourced profits, if the foreign branch remained operational. 

The rationale was that the latter had the right to utilise losses, applicable to the terms and conditions of its country of establishment. Only ‘definite’ losses due to cessation of a foreign branch could be transferred to Greece for utilisation, in case of: 

  • Non-deduction of losses in the branch’s country of establishment; and
  • Exhaustion of available possibilities for the utilisation of losses abroad. 

The taxpayer bore the burden to prove that the above conditions were met.

In July 2019, the European Commission (EC) addressed its opinion to the Greek Authorities [reasoned opinion C (2019) 4841 Final], stating that the above rule is against the EU law on freedom of establishment, per Article 49 of the Treaty on the Functioning of the European Union. 

The EC considers that tax treatment of foreign branch losses according to Circular 1200/2016 of the Greek tax administration fails to respect EU legislation, on the basis that it provides a restrictive interpretation of Article 27, paragraph 4 of the GITC, resulting to the non-utilisation of losses incurred in an EU/EEA country, through a branch located thereto. 

Furthermore, the interpretation provided by said Circular differentiates tax treatment with respect to tax loss recognition, between Greek resident taxpayers and Greek resident taxpayers with at least part of their enterprises established in other EU/EEA countries. In essence, while business profits originating domestically and those originating in another EU/EEA state are both subject to taxes in Greece, the treatment of losses incurred abroad is limited. 

Ιt has been further ruled that the need to prevent the double deduction of losses concerns cases where, in order to avoid double taxation, a country uses the method of exemption of income stemming from foreign branches, and not the credit method. It is noted that the rationale behind the ‘definite’ criterion, was the prevention of the double deduction of losses. As regards tax paid abroad, Greece generally applies the tax credit method, which stipulates that foreign income is also taxed in Greece and the tax paid abroad for said income is credited against domestic tax. 

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

The direct impact of this development is that Greek businesses that incur expenses abroad through a branch established thereto, are now entitled to use such losses at the time they incur and offset them against profits incurred in Greece, whereas the ‘definite’ criterion has now been abolished. 

For Greek businesses to be eligible to use such losses, the latter should be monitored separately per country in the Greek entity’s books, in order for their origin to be easily identifiable (already a prerequisite).

In conclusion, the above change settles the issue of deductibility of losses incurred abroad through a branch, for Greek companies, in line with EU legislation. However, whether the above provisions refer to tax or accounting losses generated from a branch established in an EU/EEA country, remains to be further clarified.

Eirini Theodoropoulou
Lawyer, EY Greece

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