In most member states, domestic losses may be set-off against other profits in the same country. However, there is only limited availability for such relief for losses incurred in other member states. The EC says that the lack of cross-border relief for losses in the member states' legislations creates a barrier to entering other markets and therefore undermines the international competitiveness of European companies.

"No company shall refrain from investing in another member states for the simple reason that losses from domestic investments are immediately taken into account, whereas losses incurred in another member state are excluded from such relief," said Taxation and Customs Commissioner Laszlo Kovacs.

"Especially, small and medium enterprises will more easily extend their activities to other member states and reap the full benefits from the internal market," he added.

Relief for losses resulting from investments within the EU is generally limited to the amount of profits generated in the same member state in which the investment is made. The lack or limited availability of cross-border loss relief results in distortions in business decisions within the internal market.

According to the Commission, these distortions lead to less efficient companies and represent a major impediment to the emergence of more competitive EU firms on the world market. This also compares unfavourably with the USA, where the federal tax base is larger than that of any individual member state and loss relief is provided for any investment made anywhere in the USA.

A lack of cross-border loss relief leads to a situation where losses become stranded in different entities. This leads to "overtaxation", since other profitable entities will be taxed on their gross profits without a taking into account of the losses.

A communication adopted by the EC therefore suggests ways in which member states may allow the cross-border relief of losses which are sustained either: within a company (i.e. losses incurred by a branch or "permanent establishment" of the company situated in another member state); or within a group of companies (i.e. losses incurred by a group member in another member state).

In its communication "Towards an Internal Market without tax obstacles" from October 2001 the EC identified the lack of cross-border loss relief as one of the most important obstacle to cross-border activities. Within the framework of the two-track strategy, the Commission committed itself to address the issue by a "targeted measure" in the short- to medium-term. In the longer-term, it would work towards providing companies with a Common Consolidated Corporate Tax Base (CCCTB) to deal with the tax obstacles comprehensively. After the introduction of the CCCTB, a targeted measure for cross-border loss relief would be complementary for all situations, where, for example, certain types of companies are not covered by the scope of the CCCTB.