CJEU: requirement for UK establishment before companies can benefit from group relief is discriminatory

The Court of Justice of the European Union (CJEU) ruled that the residence requirement under UK consortium group relief rules infringed the right to freedom of establishment within the EU. Although some of the companies involved in the case, including Hong Kong-based parent company Hutchison Whampoa Ltd, were based in non-EU 'third countries'; the UK rules made it less attractive in tax terms to set up a link company in a non-UK EU member state, the CJEU said.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said that the case was the latest in an "increasingly long line of cases" where UK rules had "rightly" been found to be discriminatory. As such, she said that the ruling "should surprise no-one".

"What will be more interesting is to see what the UK court makes of the decision: will it come up with a reason why the companies should not win anyway, as they have in other cases?" she said. "Also of interest will be what HM Revenue and Customs (HMRC) does to rectify the rules."

"Since the case started, it is no longer necessary for a link company to be resident or carrying on a trade in the UK if it is in the EEA, but it does still currently have to be a 75% member of the same group of companies as the claimant company or the surrendering company without involving a company that is not in the EEA. That will have to change. But anyone expecting HMRC to just follow the dictum of the CJEU and make the rules easier may be in for a shock: if past cases are anything to go by, expect even more convoluted rules that try to make satisfaction of the conditions a practical impossibility," she said.

In the UK, companies can deduct the losses of another company within the same group from their taxable profits so long as certain conditions are met. In certain cases, losses may also be transferred between a company that is a member of a consortium and another company owned by the consortium; and can be transferred between a company that is a member of a group and a company owned by a consortium where they are connected by a third, linked company which is a member of both the group and the consortium.

At the relevant time, UK law only allowed losses to be transferred if the company which transferred them and the company which set them against its profits were both resident in the UK or had a permanent establishment there. A number of UK-based companies, which included household names like Superdrug and Savers as well as lesser-known ports and shipping companies, sought to offset losses sustained by mobile phone company Hutchison 3G UK Ltd which is owned by a consortium including Luxembourg-based Hutchison 3G UK Investment Sàrl. The Luxembourg company is part of the same group of companies as those claiming group relief, however HMRC rejected the application because this 'linked' company was neither resident in the UK for tax purposes nor had a permanent establishment there.

In response to a referral from the UK's First Tier Tax Tribunal, the CJEU ruled that the residence condition introduced a "difference in treatment" between resident companies connected by a UK link company, which would have been entitled to claim relief, and resident companies connected by a link company established in another member state. That difference in treatment acted as a restriction on freedom of establishment, as it made it "less attractive in tax terms" for the link company to be established in another member state, it said.

"The fact that, in the dispute in the main proceedings, it is not the claimant companies established in the United Kingdom whose freedom of establishment may have been restricted does not affect the finding ... as to the existence of a difference in treatment between resident companies connected by a link company established in the United Kingdom and resident companies connected by a link company established in another member state," the CJEU said.

It added that although measures restricting freedom of establishment could potentially be justified where "designed to combat wholly artificial arrangements, aimed at circumventing the legislation of the member state concerned", this could not be argued in this case. It was also irrelevant that the parent company and some of the other intermediary companies were not based in the EU, as the status of the companies claiming the relief was based on "the location of the corporate seat and the legal order where the company is incorporated, not on the nationality of its shareholders", the CJEU said.