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UK Back In Court Over Cross-Border Loss Relief

by Ulrika Lomas, Tax-News.com, Brussels

12 October 2009


The European Commission has decided to refer the United Kingdom back to the European Court of Justice (ECJ) for improper implementation of the court's ruling in the Marks and Spencer cross-border loss relief case.

In the Commission's opinion, the relevant UK legislation imposes conditions on cross-border group loss relief "which make it virtually impossible" for taxpayers to benefit from such relief.

In the Marks and Spencer ruling the ECJ ruled that it is disproportionate to prohibit a UK parent company from deducting the losses of its non-resident subsidiary, when the latter has exhausted all possibilities for relief in its state of establishment.

Following this ruling, the UK should in principle grant relief for definitive losses of a subsidiary established in another member state. However, although the legislation has been amended, the UK continues to impose conditions on cross-border group loss relief which in practice make it prohibitive for the taxpayer to benefit from such relief in accordance with the judgment. This in particular concerns the following aspects:

Specifically, the Commission highlights the UK's "unnecessarily restrictive" interpretation of the condition that there should be no possibility of use of the loss in the state of the subsidiary. In addition, the EC points to the part of UK tax legislation which requires the parent company to demonstrate that the condition that there should be no possibility of use of the loss in the sate of the subsidiary is met as from immediately after the end of the accounting period in which the loss arises. Moreover, the legislation states that it applies only to losses incurred after April 1, 2006.

According to the Commission, these conditions render the UK legislation "incompatible with the freedom of establishment," as guaranteed by Articles 43 and 48 of the European Treaty and Articles 31 and 34 of the European eConomic Area (EEA) Agreement.

The Commission's decision on the UK's cross-border loss relief rules comes hot on the heels of a judgment by the ECJ on October 1, which found that the UK's stamp duty reserve tax infringed the EU Capital Duty Directive.

According to Liesl Fichardt, Partner, Corporate Tax, at tax advisors Berwin Leighton Paisner, such decisions by the European Court underline the "fundamentally important role" it plays to ensure consistent tax treatment under the EC Treaty.

“The UK government remains under significant pressure to bring its taxation system in line with community law - in a time when they are also becoming increasingly aggressive to collect taxes," she observed. “We are advising companies to consider their position in light of these important developments."


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