Shepherd and Wedderburn LLP
  January 18, 2006 - Scotland

Following Recent Case Law, is it Now Possible to Recover Tax Losses in Respect of European Subsidiaries?
  by George Boyle

On 13 December 2005, the European Court of Justice ("ECJ") found Marks and Spencer plc ("M&S") could claim group tax relief from UK tax authorities in relation to the losses incurred by its former European subsidiaries that had ceased trading in Belgium, France and Germany in 2001. M&S argued that just as UK resident companies in a group may set off their profits and losses among themselves, so the same should be possible for the losses of foreign subsidiaries. In response, the ECJ found that the restriction was indeed contrary to the principle of "freedom of establishment" in certain circumstances. A parent company should be able to set off the losses incurred by a foreign subsidiary provided it could demonstrate two matters to the tax authorities of the parent's state of residence. The first is that a non-resident subsidiary could not claim tax relief in its state of residence under the domestic tax law of that state. It should not be possible for the subsidiary to do this in the relevant accounting period and any previous accounting periods, even by transferring these losses to a third party or by offsetting such losses against profits made by the subsidiary in previous periods. The second is that the subsidiary's losses could not be utilised in its state of residence in future periods, whether by the subsidiary or by a third party, in particular where the subsidiary had been sold to that third party. Since M&S was able to demonstrate to the UK tax authorities that its former subsidiaries had fulfilled the necessary conditions, the ECJ found in their favour. In general terms then, a company may recover tax losses in respect of European subsidiaries only if it too can demonstrate that it fulfils the two conditions laid down by the ECJ. Case referred to: Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes) C-446/03


Footnotes:
George Boyle is a partner specialising in corporate finance with commercial law firm Shepherd+ Wedderburn. +44 (0)141 566 8515