Tuesday, April 12, 2005

And if a parent company sought to deduct losses of foreign subsidiaries?

This is what happened in the UK when Marks & Spencer went to court to try to take into account in its UK taxable base the losses incurred by its French loss-making subsidiaries. Let’s see how the European Courts are handling this issue.

In another high profile UK case, the ECJ Advocate General considered that the UK group relief scheme preventing parent company deducting losses of foreign subsidiaries incompatible with EC Treaty
Case facts:
Marks & Spencer (M&S) is a company incorporated in England and Wales and resident in the United Kingdom for tax purposes. M&S is the holding company of various United Kingdom and overseas companies. It claimed group relief for the set-off of losses incurred by non-UK resident subsidiaries in Belgium, France and Germany against the profits of UK resident companies in the group in the years 1998 to 2001. The UK Special Commissioners rejected the claim. M&S appealed the decision to the UK High Court, which stayed proceedings and remitted the case to the ECJ.
Issue at stake:
The UK High Court requested the ECJ to rule on whether or not the legislation in question constitutes a restriction under Art. 43 of the EC Treaty when read in conjunction with Art. 48 of same (freedom of establishment) and whether or not this is justified under Community law. The UK legislation prevents a resident parent company from reducing its taxable profits by setting off losses incurred by subsidiary companies resident in other EU Member States. The UK High Court also asked what difference there is if relief can be obtained for some or all of the losses incurred by the subsidiary against taxable profits in the EU Member State of the subsidiary and whether or not it would make any difference if there was evidence that relief had been obtained for the losses in the EU Member State in which the subsidiary was resident. Finally, the UK High Court asked whether or not it would matter that the relief was obtained subsequently by an unrelated group of companies to which the subsidiary was sold.
Advocate General's opinion:
The Advocate General observed that the denial of a tax advantage is a restriction incompatible with the EC Treaty if it principally relates to exercising the freedom of establishment. He held that the group relief scheme constitutes a tax advantage for a group of companies. This advantage is denied to a UK parent company, which establishes subsidiaries in other EU Member States. Accordingly, the UK legislation contains an "exit restriction", which creates an obstacle for companies established in the United Kingdom to establish subsidiaries in another EU Member State. Consequently, the UK legislation restricts the freedom of establishment.
The Advocate General concluded that the restriction could not be justified on general interest grounds, on the basis of the territoriality principle and based on fiscal cohesion.
The Advocate General, however, stated that a general prohibition of loss relief for losses sustained by foreign subsidiaries exceeds what is necessary to protect the cohesion of a group system. It would have been appropriate for the United Kingdom to take account of the treatment applying to the losses of subsidiaries in the EU Member State in which they are residents. A restriction of the relief based on the coherence principle could be accepted only if the foreign losses would be treated the same in the EU Member State in which the losses arose. Consequently, the Advocate General proposed that the granting of the loss relief benefit should be subject to the condition that the losses of a foreign subsidiary are not advantageously treated in their EU Member State of residence. If their EU Member State of residence allows those subsidiaries to impute their losses to another company or to carry them forward to another financial year, EU Member States may disallow a cross-border transfer of losses. In this case, relief must be sought in the EU Member State of residence of the subsidiary. The Advocate general conclusion is not a final decision. The final decision is expected by the end of the year.


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