Out-Law News | 24 Oct 2014 | 3:51 pm | 3 min. read
Advocate General Juliane Kokott's legal opinion is not binding on the Court of Justice of the European Union (CJEU), which is the EU's highest court. However, the CJEU follows the advice of advocate generals in the majority of cases.
In a case involving retailer Marks and Spencer (M&S) in 2005, the CJEU found that certain aspects of the UK rules on group loss relief were incompatible with the EU principle of freedom of establishment. The UK updated its corporate tax rules to reflect the decision in 2006. However, the Commission has claimed that these amendments rely on a particularly restrictive interpretation of the 2005 decision, and make very little difference to companies with non-resident subsidiaries in practice.
"The advocate general's arguments are well-reasoned but it is curiously surprising that the opinion comes to the UK's defence when you consider the wider political EU context," said corporate tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com. "When you bear in mind the oncoming financial transactions tax and the ongoing argument over the common consolidated corporate tax base, we're getting used to the idea that the EU will always be in favour of breaking down borders."
"Of course, the opinion of the AG is not necessarily the end of the matter, and we'll have to wait and see how this particular chapter of the continuing saga of the M&S decision plays out," she said.
Group relief enables a loss incurred by one member of a group of companies to be offset 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 allows 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 has now claimed that the UK's definition of 'exhausted' is particularly restrictive.
In her opinion, the advocate general said that the conditions set out by the CJEU in its 2005 decision were "anything but clear". Recent CJEU case law had, however, clarified that non-resident and resident permanent establishments were not "objectively comparable" for the purposes of EU law, in relation to measures laid down by member states in order to prevent double taxation.
"The aim of group taxation regimes is to allow the companies in a group - to differing degrees - to be taxed as if they constituted one and the same taxpayer. In the light of that aim too, the objective comparability of losses incurred by resident and non-resident subsidiaries seems doubtful. It seems inappropriate to treat a resident parent company and a non-resident subsidiary as one and the same taxpayer in so far as the non-resident subsidiary is not subject to domestic taxation at all and, as such, is not a taxpayer itself," she said.
"According to now established case law, a member state is in principle required to take into account a loss from foreign activity only if it also taxes that activity, whether the court now describes this as 'ensuring the cohesion of the tax system', 'preservation of the allocation of the power to impose taxes between member states', 'safeguarding the symmetry' between taxation of profits and deduction of losses, preventing 'losses being used twice' or preventing 'tax avoidance'," she said.
She said that this meant that the UK could be "justified in principle" if it excluded foreign subsidiaries from the group relief regime entirely. "As the contested UK rules on group relief go even further than is required by EU law in that they provide for cross-border relief in certain cases, they are not contrary to the freedom of establishment," she said.
However, Kokott added that a review of the "appropriateness" of the M&S decision was "both possible and necessary".
"[The regime] has … proved to be impracticable," she said. "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."
"The CJEU can reverse previous case law but does not do so lightly," said tax disputes expert Jake Landman of Pinsent Masons. "The CJEU may simply reject the Advocate General's invitation to reverse the right to cross border loss relief."