UK and International Tax news
Cross Border Group Relief Update
Wednesday 4th February 2015
The CJEU has just released its decision in the case of the European Commission v UK [case C-172/13] in respect of the EC’s challenge to the UK tax rules, as revised following the Marks & Spencer case, allowing cross border group relief and has held that the UK rules were compatible with EU law.
UK’s rules on group relief allow the companies in a group to offset their profits and losses between themselves. However, the rules in force until 2006 did not permit losses sustained by non-resident companies to be taken into account.
In 2006, following the judgment of the CJEU in the M&S case, the UK amended its legislation so as to allow cross-border group relief, subject to certain conditions. Under those provisions, now contained in CTA 2010, 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, and there must be no possibility of the losses being taken into account in future accounting periods. 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 CTA 2010 rules make it virtually impossible for a resident parent company to obtain cross-border group relief, since in practice it allows the resident parent company to take such losses into account in only two situations:
(i) where the legislation of the member state of residence of the subsidiary concerned makes no provision for losses to be carried forward, and
(ii) where the subsidiary is put into liquidation before the end of the accounting period in which the loss was sustained.
The EC also argued that losses sustained before 1 April 2006 were excluded from cross-border group relief, in as much as the CTA 2010 provisions concerning that relief apply only to losses sustained after 1 April 2006, the date on which the new legislation entered into force.
The EC considered the UK’s ‘no possibilities test’ infringed the principle of freedom of establishment, and brought an action before the CJEU.
Re (i) above, the CJEU found that this was irrelevant. In a situation where the legislation of the member state, where the subsidiary is based, precluded all possibility of losses being carried forward, the member state in which the parent company is resident may refuse cross-border group relief without thereby infringing freedom of establishment.
Re (ii), the Court found that the EC had not established the truth of its assertion that the CTA 2010 required the non-resident subsidiary to be put into liquidation before the end of the accounting period in which the losses were sustained in order for its resident parent company to be able to obtain cross-border group relief. CTA 2010 did not impose a requirement for the subsidiary concerned to be wound up before the end of the accounting period in which the losses were sustained.
The Court observed that losses sustained by a non-resident subsidiary may be characterised as ‘definitive’, as described in the M&S judgment, only if that subsidiary no longer has any income in its member state of residence. So long as that subsidiary continues to be in receipt of even minimal income, there is a possibility that the losses sustained may be offset by future profits made in the Member State in which it is resident.
In the case of a resident parent company which obtained cross-border group relief, the UK confirmed that it is possible to show that losses sustained by a non-resident subsidiary may be characterised as definitive where, immediately after the end of the accounting period in which the losses were sustained, that subsidiary ceased trading and sold or disposed of all its income-producing assets.
For a company to obtain cross-border group relief in respect of a period before 1 April 2006, the Court found that the EC had not established the existence of situations in which cross-border group relief for losses sustained before that date was not granted.
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