The ECJ delivers its verdict on United Kingdom group relief rules
On 13 December the ECJ has rendered its judgment in C-446/03 Marks & Spencer. The court’s decision has been eagerly awaited by tax authorities and governments in all European Member States, as well as group companies themselves.
The ECJ has declared that the British tax regime governing groups of companies is incompliant with the freedom of establishment stated in Article 43 of the EC Treaty. However, the rules are principally justified by reason of public interest.
Facts of the case
Marks & Spencer is a department store group with a parent company resident in United Kingdom and several foreign subsidiaries. Subsidiaries in Germany, Belgium and France suffered losses during several years. This led eventually to decision to divest the business activities in these countries. The parent company made claims for group relief in respect of losses incurred by EU subsidiaries in question. These claims were however rejected on the ground that that the group relief regime does not apply to foreign subsidiaries. The case was referred to ECJ for a preliminary ruling whether the tax legislation in question was compliant with the fundamental freedoms of the EC Treaty.
The judgment
The findings of the ECJ are that the United Kingdom legislation constitutes a restriction on freedom of establishment guaranteed in article 43 of the EC Treaty. In effect, the rules apply different treatment for tax purposes to losses incurred by a resident subsidiary and losses incurred by a non-resident subsidiary. They therefore discourage undertakings from setting up subsidiaries in other Member States.
The ECJ finds however that the legislation can principally be justified by overriding reasons of public interest. Yet the provisions go beyond what is necessary to attain the objectives pursued in situation where i) the losses of the foreign subsidiary cannot be taken into the account by the state of residence for the accounting period concerned by the claim and also for previous periods and ii) there is no effective possibility to take to account the losses during future periods. Read the full text.
