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UK Court Of Appeal Rules Against Government In M And S Tax Case

by Robert Lee,, London

21 February 2007

The United Kingdom tax authority was dealt a further blow at the hands of European law yesterday when the Court of Appeal in London backed previous rulings by the European Court of Justice and the High Court in the long-running saga that is the Marks and Spencer group loss relief case.

The three Court of Appeal judges effectively agreed with the High Court's interpretation of the original decision handed down by the European Court of Justice in December 2005, which said that companies could offset losses incurred by foreign subsidiaries as long as there was no "real possibility" that these could be absorbed at the local level at the time the claim was made.

In doing so, the Court of Appeal judges dismissed an appeal by HM Revenue and Customs on grounds of timing, and also rejected M&S's cross-appeal, although the verdict remains a partial victory for an estimated 300 other companies with a vested interested in the outcome of the case.

According to the ECJ's original ruling, M&S could claim tax relief for losses outside its home market, with the proviso that the loss-making subsidiaries are unable to claim tax relief in their country of establishment.

M&S, the UK-based retailer, successfully argued that UK provisions on group tax relief are in breach of European law, as they prevent an EU-based parent company from offsetting losses incurred by subsidiary companies in other member states, thus violating the principle of freedom of establishment.

"Where in one Member State the resident parent company demonstrates to the tax authorities that those conditions are fulfilled, it is contrary to freedom of establishment to preclude the possibility for the parent company to deduct from its taxable profits in that Member State the losses incurred by its non-resident subsidiary," the ECJ stated.

M&S had accumulated about GBP100 million in losses from its European operations, mainly in Belgium, France and Germany, before pulling the plug on these companies. It then attempted to offset these losses against its domestic profits in the UK.

A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at and a description of the report can be seen at

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