On February 3, 2015, the Court of Justice of the European Union (CJEU) ruled on the United Kingdom (UK) group relief rules in regard to cross-border losses. The CJEU rejected the claims of the European commission (EC) that the UK group relief rules are not in accordance with the freedom of establishment.
Marks & Spencer
In 2005, the CJEU ruled in the Marks & Spencer case that a parent company located in an EU member state may utilize losses when there is no other possibility to utilize these losses (also referred to as the “no possibilities test”), from its subsidiary located in another EU member state.
Commission vs. UK
Following the Marks & Spencer ruling in 2005, the UK amended their group relief rules for cross-border losses. The UK introduced a number of criteria that companies should meet to utilize foreign losses for their UK corporate income tax (CIT) calculation. Under Section 118 of the UK Corporation Taxation Act 2010 (CTA), a non-resident 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 previous accounting periods. Furthermore, Section 119 of the CTA states that there must be no possibility to take the losses into account in future accounting periods. The determination as to whether losses may be taken into account in future accounting periods must be made “as at the time immediately after the end” of the accounting period in which the losses were sustained.
The EC argued that the UK group relief rules, as amended following the Marks & Spencer ruling, are not in accordance with the freedom of establishment. The EC argued that the UK group relief rules would only apply in two situations:
- Where the state of the non-resident subsidiary has no provision for losses to be carried forward
- Where the non-resident subsidiary enters into liquidation before the end of the tax year in which the losses are sustained
Based on the above, the EC argued that the UK group relief rules for foreign losses are nearly impossible to utilize and therefore in contravention with EU law.
The CJEU rejected the first argument of the EC and stated that “exhausted all possibilities” does not mean a lack of a provision in the foreign member state that allows for losses to be carried forward. In respect of the second argument, the CJEU stated that it did not find any provision in UK law that requires liquidation of the EU subsidiary to apply for group relief on cross-border losses. The CJEU finally stated that the EC failed to bring an example in which the UK did not allow for cross-border group relief on foreign losses. Based on the above, the CJEU rejected the claims of the EC that the UK group relief rules are in contravention with EU law.
If you would like to receive more information regarding the consequences of the Commission vs. UK ruling on your business, or in general, please contact a Ryan International Tax professional.