On 16 April 2015 the European Court of Justice (ECJ) issued a decision in relation to Germany’s tax rules on hidden reserves. On 27 September 2012 Germany was referred to the ECJ by the European Commission which considered that Germany had discriminatory tax rules in respect of hidden reserves.

The tax rule in Germany concerned the deferral of taxation of capital gains realized on an asset that is part of the assets of a permanent establishment located in the territory of Germany. The tax deferral is subject to the condition that the capital gains are reinvested in the purchase of replacement assets that form part of the assets of a PE of the taxable person in Germany.

The judgment of the ECJ issued on 16 April 2015 was that by adopting and maintaining in force this tax rule Germany has failed to fulfil its obligations under Art 49 of the Treaty on the Functioning of the EU (TFEU) and Art 31 of the Agreement on the European Economic Area. Germany was also ordered to pay the legal costs.

Article 49 TFEU prohibits restrictions on the freedom of establishment of nationals of an EU member state in the territory of another member state. Art 31 of the EEA agreement contains similar provisions.