Parent company should be able to deduct losses of foreign subsidiaries
Today Advocate General Miguel Poiares Maduro has delivered his Opinion in the Marks & Spencer case. In this conclusion he advises to the European Court to decide in favour of Marks & Spencer because he concludes that the UK rules that prohibit deducting tax losses derived by foreign subsidiaries is incompatible with EU law. In the conclusion he also makes a suggestion how countries can reduce the effects of this reasoning by applying additional conditions.
Where the case is about
The United Kingdom system of corporation tax provides for a special regime known as group relief, under which a company in a group may surrender its losses to another company in the same group so that the latter may deduct those losses from its taxable profits. The surrendering company loses any right to use the losses surrendered for tax purposes. Relief may be granted only if the surrendering company is resident or carries on trade in the United Kingdom.
Marks & Spencer plc (‘M&S’), a United Kingdom company, is the principal trading company of a group specialising inter alia in the general retail of clothing and food. It has subsidiaries in Germany, Belgium and France. From the middle of the 1990s, those subsidiaries recorded losses. In 2001 M & S ceased trading on the Continent. M&S then sought group relief in respect of losses incurred by its subsidiaries from 1998 to 2001. Those claims were rejected by the Inspector of Taxes on the ground that the group relief scheme does not apply to subsidiaries which are neither resident nor economically active in the United Kingdom. M & S challenged that decision before the UK courts. The High Court of Justice, before which the case came on appeal, asked the Court of Justice of the European Communities whether the United Kingdom provisions were compatible with Community law, in particular with the principle of freedom of establishment.
The argumentation of the Advocate General
The Advocate General points out that the refusal of a tax advantage might be regarded as a restriction contrary to the Treaty if it was principally associated with the exercise of the right to establishment. In his view the application of the group relief scheme constitutes a tax advantage for a group of companies; a group whose parent company is resident in the UK wishing to establish subsidiaries in other Member States, is deprived of that advantage. The United Kingdom legislation therefore constitutes an ‘exit restriction’ which creates an obstacle such as to dissuade companies established in the UK from establishing subsidiaries in other Member States, and thus restricts freedom of establishment.
It must therefore be determined whether that restriction could be justified as a measure pursuing a legitimate objective justified on general-interest grounds. The Advocate General rejects the arguments that were brought in. Neither budgetary consequences, nor the territorial principle nor the need to preserve the coherence of a tax system are enough justification in this case to uphold the UK rules.
This brings the Advocate General to the conclusion that the rules that are now applied in the UK are incompatible with the Freedom of Establishment.
How it can work
The Advocate General notes that the aim of the United Kingdom scheme of group relief was to ensure the fiscal neutrality of the effects of the creation of a group of companies. The scheme allows losses to be transferred but at the same time prohibits the surrendering company from using those same losses for tax purposes.
If foreign subsidiaries are able to benefit both from the group relief scheme and at the same time from an analogous advantage in the State in which they were established, the consequence might be a twofold taking into account of the losses in favour of the group, and thus a twofold advantage. In such case the country where the parent subsidiary is resident may disallow the deduction of the foreign tax losses. This can be justified under the cohesion principle.
Accordingly, the Advocate General proposes that the benefit of the relief should be subject to the condition that the losses of foreign subsidiaries are unable to receive advantageous tax treatment in the State in which they were resident. Where the State in which the foreign subsidiaries are established enables those subsidiaries to impute their losses to another person, the Member States are entitled to oppose a claim for the cross-border transfer of those losses. Relief would then have to be sought in the State in which the subsidiary was established. Consequently, the companies would not be at liberty to choose the place of imputation of their losses; the Advocate General considers this circumstance likely to avert the risks of a ‘trafficking in losses’ at Community level.
