Provisional text

OPINION OF ADVOCATE GENERAL

ĆAPETA

delivered on 15 October 2026 (1)

Case C‑410/25

European Commission

Federal Republic of Germany

( Free movement of capital – Article 63(1) TFEU – Article 40 of the Agreement on the European Economic Area – Tax advantage in respect of the reinvestment of the capital gain realised on the disposal of certain economic assets in other economic assets – Unequal treatment of undertakings without a permanent establishment in Germany – Article 64(1) TFEU )

I. Introduction

1. The present case concerns an infringement action brought by the European Commission before the Court of Justice against the Federal Republic of Germany pursuant to Article 258 TFEU. The Commission submits that the German tax regime, which grants a tax deferral benefit for reinvestment only to undertakings with a permanent establishment in Germany, discriminates against undertakings with a permanent establishment in other Member States or EEA States, thereby infringing the free movement of capital guaranteed by Article 63(1) TFEU and Article 40 of the EEA Agreement. (2)

2. The Court has already examined one aspect of the tax regime at issue and found in an earlier judgment that allowing tax deferral only when reinvested assets are allocated to an undertaking which has a permanent establishment in Germany was in conflict with the freedom of establishment. (3)

3. The present case concerns the compatibility of another aspect of that regime with the free movement of capital, as guaranteed under EU law. The German legislation at issue grants the tax deferral benefit on the condition that the proceeds from the sale of an asset, which are reinvested in similar assets, are allocated to an undertaking with a permanent establishment in Germany. The Commission considers that requirement contrary to the free of movement of capital.

II. Legal framework

A. European Union law

4. Article 63(1) TFEU provides:

‘Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.’

5. Article 64(1) TFEU, which introduces a ‘grandfather clause’, provides:

‘The provisions of Article 63 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets. …’

6. The relevant parts of Article 65 TFEU provide:

‘1. The provisions of Article 63 shall be without prejudice to the right of Member States:

(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested;

(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.

…

3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63.’

B. The EEA Agreement

7. Article 40 of the EEA Agreement provides:

‘Within the framework of the provisions of this Agreement, there shall be no restrictions between the Contracting Parties on the movement of capital belonging to persons resident in EC Member States or EFTA States and no discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested. Annex XII contains the provisions necessary to implement this Article.’

C. German law

8. For the purposes of the present case, several German legislative acts are relevant to the taxation of undertakings. The principal acts to which I will refer in my Opinion are the Einkommensteuergesetz (Law on Income Tax; ‘the EStG’) and the Körperschaftsteuergesetz (Law on Corporation Tax; ‘the KStG’). Next to those, I will also refer to the Abgabenordnung (Tax Code; ‘the AO’).

9. The relevant parts of Paragraph 6b of the EStG provide:

‘(1) Taxable persons who sell

land,

plants which grow on the land with the land attached to them, where those plants are part of an agricultural or forestry undertaking,

buildings or boats intended for inland navigation,

may, during the financial year in which the sale took place, deduct an amount equivalent, at most, to the capital gain realised on the sale from the acquisition or production costs of the economic assets, referred to in the second sentence, which were acquired or produced during the financial year corresponding to the sale or during the previous financial year. The deduction shall be allowed for the acquisition or production costs of

1. land,

in so far as the capital gain was realised on the sale of land,

2. plants which grow on the land with the land attached to them,

where the plants are part of an agricultural or forestry undertaking, in so far as the capital gain was realised on the sale of land or on the sale of plants which grow on the land with the land attached to them,

3. buildings,

in so far as the capital gain was realised on the sale of land, of plants which grow on the land with the land attached to them, or of buildings, or

4. boats intended for inland navigation,

in so far as the capital gain was realised on the sale of boats intended for inland navigation.

The acquisition or production of buildings shall also cover their extension, expansion or renovation. In that case, the capital gain may be deducted only in respect of the costs incurred for the extension, expansion or renovation of buildings.

(2) The difference, after deduction of the sale costs, between the sale price and the book value which would have been attributable to the economic asset sold at the time of the sale is considered to be a capital gain within the meaning of the first sentence of subparagraph 1. The book value is the value which is to be attributed to an economic asset under Paragraph 6.

(2a) If economic assets referred to in the second sentence of subparagraph 1 which are attributable to the business assets of the taxable person in another Member State of [the EU] or of [the EEA] are acquired or produced in the financial year during which the sale of the economic assets referred to in the first sentence of subparagraph 1 takes place or in the following four financial years, or if they were acquired or produced in the financial year preceding the sale, the assessed tax payable on the capital gain within the meaning of subparagraph 2 may, at the request of the taxable person, be paid in five equal annual instalments; the four-year period shall be extended to six years in the case of new buildings, where their production begins before the end of the fourth financial year following the sale. The request may be made only in the financial year in which the economic assets referred to in the first sentence of subparagraph 1 are sold. The second to fifth sentences of subparagraph 5 of Paragraph 36 shall apply mutatis mutandis. Where no proof of acquisition or production as referred to in the first sentence is provided by the taxable person, interest shall be charged for the duration of the deferral of payment by way of instalments that has been granted, applying Paragraph 234 of [the AO] by analogy. Where the acquisition or production costs of the acquired or produced economic assets are lower than the capital gain within the meaning of subparagraph 2, the fourth sentence shall apply provided that the interest is charged only on the difference. In calculating the interest, the difference shall be considered to be allocated proportionately to all annual instalments. The economic assets acquired or purchased pursuant to the first sentence shall include also the economic assets attributable to the business assets of the taxable person in the United Kingdom of Great Britain and Northern Ireland, provided that the request pursuant to the first sentence was made before the United Kingdom of Great Britain and Northern Ireland ceased to be a Member State of [the EU] and also ceased to be treated as such.

(3) If the taxpayer has not made the deduction referred to in subparagraph 1, he may, during the financial year in which the sale took place, establish a reserve reducing his taxable profit. The taxable person may, taking account of the restrictions referred to in the second to fourth sentences of subparagraph 1, deduct an amount not exceeding that reserve from the costs of the acquisition or of the production of economic assets described in the second sentence of subparagraph 1, which have been acquired or produced during the subsequent four financial years, during the financial year corresponding to their acquisition or production. The four-year period shall be extended to six years for new buildings, where their production began before the end of the fourth financial year following the establishment of the reserve. The reserve must be included in the profits up to the amount deducted. If a reserve still exists at the end of the fourth financial year following its establishment, it must be included in the profits on that date, unless a deduction of production costs for buildings the production of which commenced at that time is not possible; if the reserve still exists at the end of the sixth financial year following its creation, it must be included in the profits on that date.

(4) The application of subparagraphs 1 and 3 shall be subject to the following conditions:

1. the taxable person must determine the profit under Paragraph 4(1) or Paragraph 5,

2. the economic assets sold must have constituted an integral part of the assets of a permanent establishment located within national territory for an uninterrupted period of at least six years at the time of the sale,

3. the economic assets acquired or produced must form part of the assets of a permanent establishment located within the national territory,

4. the capital gain realised on the sale must not be omitted from the calculation of the taxable profit within the national territory, and

5. the deduction under subparagraph 1 and the establishment of the reserve and its inclusion in the profits under subparagraph 3 must be capable of being traced in the accounts. …’

10. Paragraph 49 of the EStG provides:

‘(1) The following shall be domestic income for the purposes of limited income tax liability …:

…

2. Income from commercial activities …,

(a) for which a permanent establishment is maintained or a permanent representative is appointed in Germany,

…

(f) which, in so far as it does not come within the income referred to in point (a), is generated from

(aa) leasing and letting or

(bb) sale of immovable property situated in Germany, of aggregates of assets or rights within the meaning of point 1 of the first sentence of Paragraph 21(1) or other rights, in particular patent rights, trade mark rights or plant variety rights, which are situated in Germany or are entered in a public register in Germany or which are exploited in a permanent establishment or other facility situated in Germany. … Income from commercial activities shall mean also income from activities within the meaning of the present point, which is generated by a corporation for the purposes of Paragraph 2(1) of [the KStG], that is comparable to a capital company or other legal person for the purposes of Paragraph 1(1)(1) to (3) of [the KStG].’

11. The relevant parts of Paragraph 1 of the KStG provide:

‘(1) The following corporations, associations of persons and pools of assets that have their management or their registered office in Germany shall be subject to unlimited liability to corporation tax:

1. capital companies (in particular European Companies, public limited companies, partnerships limited by shares, and limited liability companies), including partnerships that have opted in for the purposes of Paragraph 1a;

2. cooperatives, including European Cooperative Societies;

3. mutual pension and insurance funds;

4. other legal persons governed by private law;

5. associations without legal personality, non-incorporated institutions, foundations and other special-purpose funds governed by private law;

6. operations of a commercial nature of legal persons governed by public law.

(2) Unlimited liability to corporation tax shall encompass all income.’

12. Paragraph 2(1) of the KStG provides:

‘The following shall be subject to limited liability to corporation tax:

1. corporations, associations of persons and pools of assets that have neither their management nor their registered office in Germany, on their domestic income; …’ .

13. The relevant parts of Paragraph 8 of the KStG provide:

‘(1) The provisions of [the EStG] and of this Law shall determine what is to be regarded as income and the way in which income is to be determined …

(2) In the case of taxpayers subject to unlimited tax liability within the meaning of Paragraph 1(1)(1) to (3), all income shall be treated as income from commercial activities.’

14. Moreover, the concept of a permanent establishment is defined in Paragraph 12 of the AO, which provides:

‘“Permanent establishment” shall mean any fixed place of business or facility serving the business of an enterprise. In particular, the following shall be considered permanent establishments:

1. the place of business management;

2. branches;

3. offices;

4. factories or workshops;

5. warehouses;

6. purchasing offices or sales outlets;

7. mines, quarries or other stationary, moving or floating facilities for the exploitation of natural resources;

8. building sites or constructions or installation projects, including those moving or floating, where

(a) an individual building site or construction or installation project, or

(b) one of several coexistent building sites or constructions or installation projects, or

last(s) more than six months.’

III. The pre-litigation procedure

15. On 27 September 2012, the Commission sent a letter of formal notice to the Federal Republic of Germany informing it of the incompatibility of its tax regime governed by Paragraph 6b of the EStG with the free movement of capital laid down in Article 63(1) TFEU and Article 40 of the EEA Agreement. According to that law, entitlement to the tax advantage established under Paragraph 6b(1) and (3) of the EStG is conditional, pursuant to Paragraph 6b(4)(2) thereof, on the asset sold having belonged continuously, for at least six years prior to its disposal, to the fixed assets of an undertaking with a permanent establishment in Germany.

16. By a letter dated 17 January 2013, the Federal Republic of Germany responded, contesting the Commission’s argument because it considered the contested legislation compatible with the free movement of capital. Moreover, it referred to the infringement proceedings that were pending before the Court of Justice concerning Paragraph 6b(4)(3) of the EStG and argued that it would be appropriate to await the outcome of those proceedings, given that Paragraph 6b(4)(2) and Paragraph 6b(4)(3) of the EStG constitute common conditions for entitlement to the tax advantage pursuant to Paragraph 6b(1) and (3) thereof and that, consequently, the Court’s position would also be applicable to the present case.

17. On 16 April 2015, the Court delivered its judgment in Commission v Germany (freedom of establishment), in which it found that the German tax regime at issue was incompatible with the freedom of establishment under Article 49 TFEU and Article 31 of the EEA Agreement.

18. That case concerned Paragraph 6b(4)(3) of the EStG, under which taxation of capital gains on the sale of certain assets could be deferred only where the replacement asset formed part of the fixed assets of an undertaking with a permanent establishment in Germany. The Court considered that this difference in treatment was liable to give rise to a cash-flow disadvantage for the taxable person wishing to reinvest capital gains in order to acquire a replacement asset intended for a permanent establishment located within the territory of a Member State other than Germany, in comparison with a taxable person who carries out a similar reinvestment in an undertaking with a permanent establishment in Germany. The Court therefore found that such a difference in treatment is at the very least liable to make reinvestment effected outside Germany less attractive than reinvestment effected within Germany. For that reason, the Court decided that the Federal Republic of Germany, by maintaining the tax regime at issue, infringed Article 49 TFEU and Article 31 of the EEA Agreement as it was capable of deterring a taxable person established in that Member State from carrying out its activities through a permanent establishment located within the territory of a Member State other than Germany. (4)

19. Following the Court’s judgment, the Federal Republic of Germany introduced Paragraph 6b(2a) into Paragraph 6b of the EStG. That provision allows for the tax payable on the capital gain realised on the sale of the original asset to be deferred and paid over a maximum period of five years, where the taxpayer referred to in Paragraph 6b(4)(2) of the EStG acquires or produces a replacement asset allocated to the business assets of the taxable person in another Member State or EEA State. As confirmed at the hearing, the Commission considers the amendment to German law satisfactory because it rectifies the infringement of the freedom of establishment. The infringement proceedings were therefore closed.

20. However, Paragraph 6b(4)(2) of the EStG, which was not at issue in Commission v Germany (freedom of establishment), was not amended. Considering that that provision, which contains conditions for entitlement to the tax advantage at issue, infringes the free movement of capital under EU law, the Commission decided to continue with the infringement proceedings relating to that market freedom.

21. Thus, on 15 February 2017, the Commission sent a supplementary letter of formal notice to the Federal Republic of Germany.

22. By letter dated 12 April 2017, the Federal Republic of Germany contested the Commission’s position and maintained its position expressed in its original response to the Commission’s first letter of formal notice.

23. On 27 November 2019, the Commission issued a reasoned opinion pursuant to Article 258 TFEU confirming its position that Paragraph 6b(4)(2) of the EStG is incompatible with Article 63(1) TFEU and Article 40 of the EEA Agreement. Moreover, the Commission invited the Federal Republic of Germany to comply with the reasoned opinion within two months of its notification.

24. On 24 January 2020, the Federal Republic of Germany responded to the reasoned opinion, reiterating the position expressed in its reply to the letter of formal notice.

IV. The procedure before the Court

25. On 23 June 2025, taking the view that the Federal Republic of Germany had failed to take the measures necessary to comply with the reasoned opinion within the time limit laid down, the Commission decided to bring the present action, requesting that the Court declare that the Federal Republic of Germany has failed to fulfil its obligations under Article 63(1) TFEU and Article 40 of the EEA Agreement by making entitlement to the tax advantage in question conditional on the undertaking having a permanent establishment in Germany.

26. In its defence lodged on 1 September 2025, the Federal Republic of Germany requested that the Court dismiss the present action.

27. The Commission and the Federal Republic of Germany also lodged a reply and rejoinder on 10 October 2025 and 12 November 2025, respectively.

28. A hearing was held on 25 June 2026 at which the Commission and the Federal Republic of Germany presented oral argument.

V. Analysis

A. Introduction

1. The action and the structure of the analysis

29. By the present action, the Commission requests that the Court declare the German tax regime established by Paragraph 6b of the EStG incompatible with the free movement of capital. In particular, the Commission considers that Paragraph 6b(4)(2) of the EStG infringes Article 63(1) TFEU and Article 40 of the EEA Agreement on the ground that it deprives undertakings with no permanent establishment in Germany from benefitting from the tax deferral in question, even though those undertakings are in comparable situations with undertakings with a permanent establishment in Germany, which are entitled to that tax advantage.

30. According to Article 63(1) TFEU, all restrictions on the free movement of capital between Member States and between Member States and third countries are prohibited. That prohibition includes, inter alia, restrictions that discourage non-residents from making investments in a Member State or those that discourage that Member State’s residents from doing so in other Member States. (5)

31. In the present case, the relevant distinction between different types of undertaking is not based on residence, but rather on whether undertakings have a permanent establishment in Germany.

32. There are three categories of taxable persons, which are relevant for understanding the present case.

33. The first category consists of resident undertakings. According to German law, resident undertakings are those undertakings that have either their place of effective management or their registered office in Germany. (6) Such undertakings are subject to unlimited corporate income tax liability. (7)

34. The second category consists of non-resident undertakings, which are those that have neither their place of effective management nor their registered office in Germany, but which have some sort of permanent business presence in Germany, as specified by Paragraph 12 of the AO. Those non-resident undertakings are considered to have a permanent establishment in Germany and are subject to limited tax liability, which includes corporate income tax on trade or business carried out locally.

35. Finally, the third category consists of non-resident undertakings that have no permanent establishment in Germany. Those undertakings are in principle not taxable in Germany. However, there are exceptions. One such exception, which is relevant in the present case, is provided for in Paragraph 49(1)(2)(f) of the EStG, according to which non-resident undertakings with no permanent establishment in Germany are nevertheless subject to limited corporate income tax on profits from sales of immovable property located in that Member State.

36. It is in relation to that last category of undertakings that the Commission claims that the German tax regime in question infringes Article 63(1) TFEU and Article 40 of the EEA Agreement, because it excludes those undertakings from the tax advantage under Paragraph 6b of the EStG.

37. The tax advantage at issue consists of a tax deferral granted on the condition that the capital gain realised on the sale of the fixed asset (‘the original asset’) is reinvested, either in the same year (8) or within a maximum period of six years after the sale of the original asset, (9) in another similar asset (‘the replacement asset’). (10) The deferral is affected by deducting the amount of the capital gain from the costs of the replacement asset. (11) If the reinvestment does not occur in the same year in which the original asset is sold, the German legislation enables the creation of a tax reserve, entered in the business books, showing capital gains as not (yet) realised. That reserve can be used to decrease the costs of the replacement asset within a maximum time period of six years. If that reserve is not used for reinvestment during that time, the undertaking must include it in its profits at the end of the financial year in which the deadline for reinvestment elapses, and will be liable to pay corporate income tax on that reserved amount. (12)

38. If the replacement asset is allocated to an undertaking with a permanent establishment in Germany, the payment of tax is deferred until the moment when the replacement asset – whose book value is decreased by deducting the capital gain on the first asset – is sold. At that moment, which may be long after the sale of the original asset, the Federal Republic of Germany will in fact collect taxes on the capital gain realised by selling the original asset together with taxes on the capital gain from the replacement asset, as they are now part of the higher capital gain resulting from the sale of the newly acquired asset, due to the decrease in its book value. If the replacement asset is allocated to an undertaking with no permanent establishment in Germany, on the basis of Paragraph 6b(2a) of the EStG, which was introduced as an amendment following the judgment in Commission v Germany (right of establishment), that undertaking can opt to pay the tax in five instalments.

39. The entitlement to the tax advantage is conditioned on two requirements, pursuant to Paragraph 6b(4)(2) of the EStG. First, the original asset must have been part of the fixed assets of the undertaking for an uninterrupted period of at least six years prior to its sale. The Commission did not find that part of the German legislation problematic.

40. Second, the original asset had to be allocated (13) to the fixed assets of an undertaking with a permanent establishment in Germany during those six years.

41. Accordingly, an undertaking with a permanent establishment in another Member State or EEA State is not eligible for the tax deferral, even where the original asset was allocated to it for the required period. Such an undertaking must pay the corporate income tax immediately upon the disposal of the original asset. It is this aspect of the tax regime at issue that the Commission considers to be in breach of Article 63(1) TFEU.

42. In order to decide whether to uphold or reject the Commission’s claim, the Court will have to assess whether the differentiation made by the German legislation in relation to the tax advantage at issue constitutes a restriction on the capital investments of undertakings with no permanent establishment in Germany contrary to Article 63(1) TFEU and Article 40 of the EEA Agreement.

43. My analysis will proceed as follows. I will first argue that the German tax regime at issue represents a restriction on the cross-border movement of capital (B) and that that restriction is not permitted under Article 65(1)(a) TFEU (C). Thereafter, I will assess whether the restriction can be justified on the basis of an overriding reason in the public interest, as argued by the German Government (D). Finally, I will briefly examine the application of the ‘grandfather clause’ contained in Article 64(1) TFEU (E).

2. Article 40 of the EEA Agreement

44. The Commission claims that there is an infringement of Article 63(1) TFEU and Article 40 of the EEA Agreement.

45. In that respect, I must point out at the outset that the EEA Agreement aims to guarantee, among other things, the fullest possible realisation of the free movement of goods, persons, services and capital within the whole of the EEA, in order to extend the EU’s internal market to the EEA States. From that angle, the provisions of the agreement must be interpreted uniformly. (14) The Court has therefore held that the rules of the EEA Agreement that are identical in substance to those of the Treaty must be interpreted uniformly within the Member States. (15)

46. Based on the established case-law of the Court, (16) restrictions of the free movement of capital between nationals of States party to the EEA Agreement must be assessed in the light of Article 40 of and Annex XII to that agreement. Those provisions have, in that regard, the same legal scope as the substantively identical provisions of Article 63 TFEU. Accordingly, I will not separately address the claim relating to the infringement of Article 40 of the EEA Agreement. Rather, the analysis that follows with regard to Article 63(1) TFEU applies equally to that provision.

B. Is there a restriction on the free movement of capital?

47. In the present case, the national legislation at issue establishes a difference in tax treatment between undertakings with a permanent establishment in Germany and undertakings with no such permanent establishment.

48. The Federal Republic of Germany submits that that differentiation is not based on the ‘nationality’ of undertakings, as undertakings that have a registered office in Germany, and are therefore considered resident undertakings for tax purposes, but have their effective place of management in another Member State or EEA State, and no other permanent establishment in Germany, are also excluded from the tax advantage at issue.

49. While such a scenario may indeed be possible, I agree with the Commission that an undertaking registered in Germany is more likely to have its permanent establishment in Germany than a non-resident undertaking.

50. In that sense, the German legislation in question has the effect of discouraging a greater number of the non-resident undertakings from investing in immovable property in Germany or from reinvesting their capital by selling assets in Germany.

51. Similarly, it is irrelevant in that respect that, as contended by the German Government, non-resident undertakings can have permanent establishment in Germany and therefore be eligible for the tax advantage at issue. That does not negate the claim that a greater number of non-resident undertakings will be deprived of the tax advantage at issue than resident undertakings.

52. Therefore, by conditioning the tax advantage at issue on the existence of a permanent establishment in Germany, the German legislation at issue creates a restriction on the freedom of cross-border movement of capital.

53. That being said, pursuant to Article 65(1)(a) TFEU, the provisions of Article 63(1) TFEU are, nonetheless, without prejudice to the right of Member States to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence.

C. Objective comparability

54. Can the Federal Republic of Germany rely on Article 65(1)(a) TFEU to exclude the tax legislation at issue from the scope of application of Article 63(1) TFEU?

55. As the Court has reiterated in its case-law, ‘Article 65(1)(a) TFEU, in so far as it is a derogation from the fundamental principle of the free movement of capital, must be interpreted strictly. That provision cannot therefore be interpreted as meaning that all tax legislation which draws a distinction between taxpayers based on their place of residence or the State in which they invest their capital is automatically compatible with the Treaty …’. (17)

56. ‘The differences in treatment permitted by Article 65(1)(a) TFEU must not constitute, according to Article 65(3) TFEU, a means of arbitrary discrimination or a disguised restriction. … such differences in treatment are permitted only when they concern situations which are not objectively comparable or, otherwise, when they are justified by an overriding reason in the public interest …’. (18)

57. Thus, the German legislation at issue would be permitted under Article 65(1)(a) TFEU only if the situation of an undertaking without a permanent establishment in Germany is not objectively comparable to that of an undertaking with a permanent establishment in Germany.

58. According to the Court’s case-law, ‘the comparability or otherwise of a cross-border situation with a domestic situation must be examined having regard to the objective pursued by the national provisions at issue and to the purpose and content of those provisions, and … only the relevant distinguishing criteria established by the legislation at issue must be taken into account for the purpose of assessing whether the difference in treatment resulting from such legislation reflects a difference in objective situation …’. (19)

59. In that regard, both the Commission and the German Government agree that Paragraph 6b(4)(2) of the EStG must be interpreted in the light of Paragraph 49(1)(2)(f) thereof. However, they disagree with respect to the aim of the latter provision.

60. The Commission’s understanding of Paragraph 49(1)(2)(f) of the EStG stems from the legislative history of that provision. It contends that that provision expressly targeted situations where the non‑resident undertakings own real estate in Germany but do not carry out any commercial activity. The introduction of subparagraph (f) was intended to guarantee equal treatment for foreign and domestic undertakings that are engaged in asset management activities. In that sense, the German legislature considered their situations comparable, as both undertakings manage real estate in Germany, and their activities are the same.

61. The German Government agrees that the provision at issue places all undertakings managing real estate in Germany on an equal footing. However, it contests the Commission’s view on the main purpose of that provision. It asserts that the sole purpose of Paragraph 49(1)(2)(f) of the EStG is to ensure that the capital gains derived from immovable property transactions are qualified as industrial or commercial income (and no longer as leasing income), irrespective of the existence of a permanent establishment in Germany. In that sense, the German Government asserts that that provision is not linked to creating any fiction of a permanent establishment situated within the national territory, and it serves solely to place domestic and foreign undertakings on an equal footing for the purpose of taxation of the capital gain on immovable property.

62. Whatever the correct understanding of the objective of Paragraph 49(1)(2)(f) of the EStG is, it cannot be denied that that provision subjects non-resident undertakings with no permanent establishment in Germany to payment of corporate income tax on the capital gain realised from selling immovable property located in Germany. In relation to that particular tax, therefore, undertakings with no permanent establishment in Germany are in the same position as undertakings with such a permanent establishment.

63. However, even though they are liable to pay the same tax, those undertakings cannot benefit from a deferral of payment of that tax. Are there objective differences in relation to the purpose of that tax advantage between the undertakings with and those without a permanent establishment in Germany?

64. According to the German Government, the objective of the tax advantage at issue is to encourage and better facilitate the restructuring of undertakings through reinvestment in fixed replacement assets. This increases the flexibility and adaptability of undertakings in order to facilitate their economic adaptation to structural changes. (20) Hence, the comparability between the cross-border situation and the domestic one must take into consideration that purpose.

65. In that respect, I consider that, having regard to the objective pursued by the national legislation at issue, undertakings with a permanent establishment in other Member States (or EEA States) are in a comparable situation to that of undertakings with a permanent establishment in Germany. Both categories of undertakings may realise capital gains from the disposal of immovable property located in Germany and may need the flexibility to reinvest those capital gains in order to adapt to structural and economic changes. The mere fact that an undertaking’s permanent establishment is located in another Member State does not, in itself, place such an undertaking in a different situation with regard to the objective pursued by the provision at issue. (21)

66. In sum, the position of an undertaking with no permanent establishment in Germany is comparable to the situation of an undertaking with a permanent establishment in Germany. They are both subject to corporate income tax payable on the capital gain from the sale of a fixed asset in Germany, but the former must pay that tax immediately, while the latter can defer payment. That benefit makes reinvestment more attractive to undertakings with a permanent establishment in Germany than those undertakings without one, even if the intentions behind the reinvestment are the same.

67. Therefore, the differential treatment of the non-resident undertakings with no permanent establishment in Germany and undertakings with such a permanent establishment is prohibited under Article 65(1)(a) TFEU, as both are in objectively comparable situations when the objectives of the German tax regime at issue are taken into consideration. The German tax regime at issue thus infringes Article 63(1) TFEU, unless the restriction it introduces can be justified by overriding reasons in the public interest advanced by the German Government.

D. Overriding reasons in the public interest and the proportionality of the German tax regime

68. According to the Court’s settled case-law, a restriction on the free movement of capital may be permitted if it is justified by overriding reasons relating to the public interest, is suitable for securing, in a consistent and systematic manner, the attainment of the objective which it pursues and does not go beyond what is necessary in order to attain that objective. (22)

69. In the event that the Court finds that the provisions at issue constitute a restriction on the free movement of capital under Article 63(1) TFEU, the German Government invoked three grounds which justify that restriction: (1) the promotion of investment in Germany, (2) the coherence of the tax system, and (3) the balanced allocation of taxing powers between the Member States.

1. The promotion of investment in Germany

70. The German Government claims that if the Court finds that the legislation at issue restricts the free movement of capital, that restriction is necessary to promote investment in Germany and ensure the survival of undertakings with a permanent presence in Germany. It also argues that, relying on the Court’s case-law, the promotion of investment, especially when connected with the survival of small and medium-sized enterprises (SMEs) and with the maintenance of employment within those businesses, may, in certain circumstances and subject to certain conditions, constitute an acceptable justification for national legislation providing for a tax advantage in favour of natural or legal persons. (23)

71. In that respect, even if the requirement to have a permanent establishment in the Member State in question was indeed necessary to achieve the objective of supporting undertakings with a permanent establishment in Germany and stimulating their economic activity in that Member State, that objective is purely economic in nature.

72. Based on the Court’s settled case-law, a purely economic objective cannot, in principle, constitute an overriding reason in the public interest capable of justifying a restriction on the free movement of capital. (24)

73. Moreover, even if such an objective were regarded as permissible, facilitating the reinvestment of capital gains does not, in itself, guarantee that a company will maintain its business activity in Germany.

74. Finally, even if a tax regime designed to support SMEs might be accepted as a justification for the restriction on the free movement of capital, there is nothing to suggest that the German legislation at issue is intended to support SMEs. Rather, the tax advantage is available to any resident undertakings with a permanent establishment in Germany that decide to reinvest the profits from the sale of immovable property in new fixed assets within the maximum period of six years.

75. Consequently, the German Government’s argument that the restriction on the free movement of capital is justified by the need to promote investments in Germany cannot be upheld.

2. The coherence of the tax system

76. The German Government claims that, if the Court finds that the legislation at issue restricts the free movement of capital, that restriction may be justified by the need to preserve the coherence of the tax system. Non-resident undertakings with no permanent establishment in Germany enjoy a fiscal advantage: they are not liable to pay the locally collected trade tax. That exemption means that non-resident undertakings cannot enjoy the tax advantage at issue in the present case, which, for reasons of tax coherence, may be enjoyed only by resident undertakings, which are subject to the local trade tax. Consequently, extending the tax advantage at issue to non‑resident undertakings would, in the German Government’s view, either discriminate against resident undertakings that are liable to pay the local trade tax or would confer an unjustified advantage on non‑resident undertakings, as the latter are not liable to pay the local trade tax.

77. To support that argument, the German Government refers to the case-law of the Court according to which the need to preserve the coherence of a tax system may justify a restriction on the exercise of the fundamental freedoms under the condition that a direct link is established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy. (25)

78. In that respect, it stems from the case-law of the Court that the overall fiscal position of a taxpayer cannot be taken into account to determine whether the provision in question breaches the free movement of capital. Instead, the existence of the unfavourable tax treatment must be assessed by reference to the specific legislation at issue. (26)

79. Given that the tax advantage at issue relates to corporate income tax and enables the deferral of payment of that tax, undertakings with no permanent establishment in Germany are in comparable situations to undertakings with a permanent establishment, even if it is only the latter that are subject to the local trade tax.

80. As the Commission argued, I do not believe that the German Government has established the existence of a direct link between the tax advantage and the offsetting of it by the local trade tax. That trade tax, to which undertakings with a permanent establishment in Germany are subject, does not offset the disadvantage created by the exclusion of undertakings with no permanent establishment in Germany from the deferral of payment of corporate income tax. The two taxes are different taxes. The tax advantage at issue is linked only to corporate income tax, and not to the local trade tax.

81. The corporate income tax and the local trade tax constitute, as the Commission submitted, two separate taxes governed by different legal conditions. In the present case, the alleged discrimination stems from the different treatment of the realised capital gain, based on the place of the undertaking’s permanent establishment, rather than on the coexistence of different tax levies. In other words, both types of undertakings are liable to pay corporate income tax when realising the capital gain from the sale of real estate located in Germany, but only resident undertakings with a permanent establishment in Germany are entitled to the tax advantage at issue. Thus, the liability to pay the local trade tax under German law is irrelevant for the present case.

82. Consequently, in my view, the German Government cannot rely on the existence of the liability to pay the local trade tax imposed (only) on undertakings with a permanent establishment in Germany to justify any differential treatment between resident and non-resident undertakings.

3. The balanced distribution of the taxing powers among the Member States

83. The German Government claims that the restriction in question may also be justified by the need to safeguard a balanced distribution of the taxing powers among the Member States. According to that government’s interpretation of paragraph 69 of the Court’s judgment in Commission v Germany (freedom of establishment), the Court held that a reinvestment of a capital gain that will be used to acquire replacement assets abroad does not oblige the Federal Republic of Germany to waive its right to tax that gain before it leaves its jurisdiction. The Federal Republic of Germany, therefore, enacted a tax advantage which applies the reasoning of that judgment. In particular, according to the German Government, Paragraph 6b(4)(2) of the EStG implements the allocation of taxing rights that Member States have agreed upon in bilateral conventions, and it reflects the principle that each State should share in the economic success generated by the infrastructure it provides, while excluding tax advantages for non‑resident undertakings whose unrealised capital gains were generated abroad. Extending the scope of that provision would reinforce an already favourable regime for non-resident undertakings (thanks to their exemption from payment of the local trade tax), encourage tax avoidance and evasion, and distort competition, thereby harming the internal market through discriminatory tax treatment, and contradicting the aim of the fundamental freedoms.

84. I am of the view, like the Commission, that the Federal Republic of Germany is not required to waive its right to tax the capital gain realised from the sale of the original asset located in Germany. Under the principle of fiscal territoriality, Member States retain the right to tax capital gains generated on their territory. (27)

85. However, the immediate taxation of the capital gain realised by a non-resident undertaking goes beyond what is necessary to achieve the objective of preserving the distribution of taxing powers, given that there are less restrictive measures than immediate taxation. Similarly , as the Court found in Commission v Germany (freedom of establishment), (28) the taxable person with no permanent establishment in Germany may be given a choice between the immediate payment of the tax and the deferred payment of that tax. Collection of that tax may be organised in such a way so as to allow Germany to maintain control over the later collection of taxes, notwithstanding its lack of direct control of the bookkeeping of the undertaking, due to the lack of any permanent establishment in Germany.

86. Consequently, the German Government’s argument that the exclusion of non-resident undertakings with no permanent establishment in Germany from the tax deferral is justified on the basis of the Member State’s taxing power cannot be upheld.

87. Given that German tax regime at issue restricts the cross-border movement of capital by excluding undertakings with no permanent establishment in Germany from benefiting from the tax deferral, despite being subject to the same corporate income tax regime as undertakings with a permanent establishment in Germany, which benefit from the tax deferral, and that such a differentiation in treatment cannot be justified on the basis of any of the overriding reasons in the public interest advanced by the German Government, I propose that the Court find that the German tax regime at issue infringes Article 63(1) TFEU.

E. The application of Article 64(1) TFEU concerning restrictions on the free movement of capital with regard to third countries

88. Article 64(1) TFEU contains a ‘grandfather clause’ which limits the temporal scope of the application of Article 63 TFEU with respect to restrictions which existed on 31 December 1993 under national or EU law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets.

89. That clause can be invoked in relations with third countries, but not in relations with the States party to the EEA agreement. (29)

90. The German Government states that Paragraph 6b of the EStG was introduced into that national law by the Steueränderungsgesetz (Tax Amendment Law) of 1964. That provision applies to investments in resident undertakings, and allows for the establishment of hidden reserves consisting of capital gains that arise from the individual sale of certain real estate assets, to be used for reinvestment purposes. It thus falls within the scope of Article 64(1) TFEU.

91. Therefore, Germany’s tax regime is not contrary to the Treaties if applied in relation to third countries.

92. The Commission confirmed at the hearing that it does not contest that argument.

VI. Costs

93. Under Article 138(1) of the Rules of Procedure of the Court, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has claimed that the Federal Republic of Germany should be ordered to pay the costs and the Federal Republic of Germany has been unsuccessful, it must be ordered to pay the costs.

VII. Conclusion

94. In the light of the foregoing considerations, I propose that the Court:

(1) Declare that, by adopting and maintaining in force the tax regime provided for in Paragraph 6b(4)(2) of the Einkommensteuergesetz (Law on Income Tax), which makes the benefit of the deferral of taxation of the capital gain realised on the disposal of an economic asset, in the event of its reinvestment, subject to the condition that the asset has formed part of the fixed assets of a taxable person with a permanent establishment in Germany for at least six years prior to its disposal, the Federal Republic of Germany has failed to fulfil its obligations under Article 63(1) TFEU and Article 40 of the Agreement on the European Economic Area of 2 May 1992;

(2) Order the Federal Republic of Germany to pay the costs.

1 Original language: English.

2 Agreement on the European Economic Area of 2 May 1992 (OJ 1994 L 1, p. 3; ‘the EEA agreement’).

3 See judgment of 16 April 2015, Commission v Germany (freedom of establishment) (C‑591/13, ‘Commission v Germany (freedom of establishment)’, EU:C:2015:230).

4 Commission v Germany (freedom of establishment), paragraphs 58 and 59.

5 See judgment of 27 February 2025, Dyrektor Krajowej Informacji Skarbowej (Management form of a UCI) (C‑18/23, EU:C:2025:119, paragraph 57 and the case-law cited).

6 See Paragraph 1 of the KStG.

7 Ibid.

8 Paragraph 6b(1) of the EStG.

9 Paragraph 6b(3) of the EStG.

10 According to Paragraph 6b(1) of the EStG, a plot of land can be replaced with another plot of land; plants attached to a plot of land with a plot of land or plants attached to a plot of land; buildings with land, plants attached to a plot of land or buildings; and boats intended for inland navigation with boats intended for inland navigation.

11 According to Paragraph 6b(2) of the EStG, a capital gain is calculated as the difference, after deduction of the sale costs, between the sale price and the book value which would have been attributable to the economic asset sold at the time of the sale.

12 Which is the scenario envisaged in Paragraph 6b(3) of the EStG.

13 At the hearing, the German Government explained that the allocation of assets to the fixed assets of a permanent establishment is done through their registration and publication in the commercial register.

14 See Opinion 1/92 (Second Opinion on the EEA Agreement) of 10 April 1992 (EU:C:1992:189).

15 See judgment of 13 November 2025, Familienstiftung (C‑142/24, ‘Familienstiftung’, EU:C:2025:873, paragraph 31 and the case-law cited).

16 See Familienstiftung, paragraph 35 and the case-law cited.

17 See Familienstiftung, paragraph 53 and the case-law cited.

18 Judgment of 16 November 2023, Autoridade Tributária e Aduaneira (Capital gains on share transfers) (C‑472/22, EU:C:2023:880, paragraph 28 and case-law cited).

19 See, for example, judgment of 27 April 2023, L Fund (C‑537/20, ‘L Fund’, EU:C:2023:339, paragraph 54 and the case-law cited).

20 According to the statement of the German Government provided in the Communication of 17 January 2013 to the Commission.

21 The Court followed that same line of reasoning in L Fund, paragraphs 57 to 62.

22 See L Fund, paragraph 66 and the case-law cited.

23 To support that argument, the German Government refers to judgment of 25 October 2007, Geurts and Vogten (C‑464/05, EU:C:2007:631, paragraph 26).

24 See, for example, judgments of 6 June 2000, Verkooijen (C‑35/98, EU:C:2000:294, paragraph 48), and of 25 February 2021, Novo Banco (C‑712/19, EU:C:2021:137, paragraph 40 and the case-law cited).

25 See judgment of 26 October 2006, Commission v Portugal (C‑345/05, EU:C:2006:685, paragraph 29 and the case-law cited).

26 See, in that respect, judgment of 28 January 1986, Commission v France (270/83, EU:C:1986:37, paragraph 21), to which the Commission referred at the hearing. As the Commission argued, the reasoning applied by the Court in that judgment can also be applied to the present case despite the fact that it concerned the freedom of establishment.

27 Commission v Germany (freedom of establishment), paragraph 65.

28 See paragraph 73 thereof.

29 See, for example, order of 24 June 2011, projektart and Others (C‑476/10, EU:C:2011:422, paragraph 36).