The European Court of Justice on February 3 ruled that a UK law that puts restrictions on the ability of group companies to offset gains with nonresident company losses is compatible with EU law. The court rejected the European Commission’s claim that the law made it “virtually impossible” to obtain group loss relief for nonresident subsidiaries in contravention of freedom of establishment principles set out in the Marks & Spencer case.
In dismissing the action, the ECJ did not heed the advice of ECJ Advocate General Juliane Kokottof, who on October 23, 2014, recommended that the court abandon the Marks & Spencer exception. Kokottof said that the principles of the exception are not clear and have caused an unacceptable amount of litigation.
The UK law provides that for a group to offset gains with a nonresident company’s losses, the nonresident company must have exhausted all possibility of having the losses taken into account in the accounting period in which the losses were incurred or in earlier periods, and there must be no possibility that the losses will be taken into account in future periods. The law further provides that the determination of whether losses may be taken into account in future periods must be made “at the time immediately after the end” of the accounting period in which the losses were sustained.
The European Commission brought an action before the Court of Justice, contending that the law infringed the principle of freedom of establishment. The Commission argued that the set up made it only possible to use nonresident subsidiary losses in cases where losses can not be carried forward in the subsidiary’s state of residence or where the subsidiary enters liquidation before the end of the tax year in which the losses are sustained.
Ruling in favor of the UK, the ECJ concluded that the Commission had not “established the truth of its assertions.” In fact, the UK was able to cite an example of a case where cross-border group loss relief was obtained where, immediately after the end of the accounting period in which the losses had been sustained, the subsidiary ceased trading and sold or disposed of all its income producing assets.
The court said that losses sustained by a nonresident company may be characterized as definitive within the meaning of Marks and Spencer only if that subsidiary no longer has any income in the state of residence. “So long as that subsidiary continues to be in receipt of even minimal income, there is a possibility that the losses sustained may yet be offset by future profits made in the Member State in which it is resident,” the ECJ said.
The court also said that the Member State of the parent company may refuse cross-border group relief without infringing freedom of establishment if the Member State of the subsidiary precludes all possibility of losses being carried forward.
See:
Related MNE Tax articles:
Be the first to comment