UK corporate tax cross-border group relief rules 'compatible with EU law', says CJEU

The Court of Justice of the European Union (CJEU) found that changes to the UK's rules on group loss relief, introduced in 2006, were compatible with EU law. These changes were intended to reflect the CJEU's 2005 decision that certain aspects of the then rules were incompatible with the EU principle of freedom of establishment, in a case involving retailer Marks and Spencer (M&S).

In its judgment, the CJEU acknowledged that the UK applied different rules to the losses of non-UK resident subsidiaries than it did to the losses of UK-resident subsidiaries. However, it was entitled to do so and, following the 2006 changes, did so in a proportionate way, it said.

UK group relief rules allow companies to offset losses incurred by one member of a group of companies against the profits of another. In the M&S case, the retailer had attempted to use group relief to offset losses made by its now-closed Belgian and German subsidiaries against UK profits. However, UK legislation at the time restricted group relief to losses of UK resident companies and losses of UK branches of non-resident companies.

In 2005, the CJEU ruled that if a member state allowed a resident parent company to transfer losses suffered to a member of the group established within that member state in order to reduce its tax liability, it must offer the same possibility with respect to losses incurred by a subsidiary established in another member state where all other possibilities for relief had been exhausted. The Commission argued that the UK's means of implementing this change prevented the use of group relief "in the normal commercial situation" if the parent company and its subsidiary were located in different member states.

According to the Commission, parent companies could only ever claim for the losses of their non-UK subsidiaries in two scenarios: firstly, if there were no provisions for carrying forward losses in the subsidiary's member state; and secondly, if the subsidiary was liquidated before the end of the accounting period that the loss took place in. However, the CJEU found that the first of these scenarios was "irrelevant" to freedom of establishment; while the Commission had "not established the truth of" the second scenario.

"Under [the UK rules], the assessment as to whether the losses sustained by a non-resident subsidiary may be characterised as definitive … must be made by reference to the situation obtaining 'immediately after the end' of the accounting period in which the losses were sustained," the CJEU said. "It is thus clear from the wording of that provision that it does not, on any view, impose any requirement for the subsidiary concerned to be wound up before the end of the accounting period in which the losses are sustained."

"Secondly, it should be borne in mind that losses sustained by a non-resident subsidiary may be characterised as definitive … only if that subsidiary no longer has any income in its member 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 court said.

The Commission had also argued that UK parent companies could not claim cross-border group relief on any losses before the new rules came into force on 1 April 2006. However, the CJEU rejected this argument, finding that the Commission had "not established the existence of" situations in which relief for losses before this date had not been granted.

In October 2014 Advocate General Kokott gave her opinion on the case. Like the CJEU she found for the UK.

Catherine Robins , a tax expert at Pinsent Masons, the law firm behind Out-law.com said that "Unlike the Advocate General, the CJEU did not go as far as saying that the whole system of cross–border group relief needed to be looked at or that the UK's rules go further than is necessary".

Kokott said "[The regime] has … proved to be impracticable, It therefore does not protect the interests of the internal market and, as such, is also not a less onerous means of guaranteeing the fiscal sovereignty of member states as it does not facilitate the activity of cross-border groups but rather constitutes a virtually inexhaustible source of legal disputes between taxpayers and the member states' tax administrations."

"Following this decision, UK based groups wanting to take advantage of cross border relief are still in the position where they need to take action very quickly after losses have been made in an overseas subsidiary, if they are to have any chance of relieving those losses in the UK" said Catherine Robins.