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22 October 2000
Companies in territories which operate a credit system in relation to United Kingdom branch income and which allow United Kingdom branch losses to reduce the total profits taxable will generally not be able to surrender losses. This will still apply where the overseas company also makes a loss on its domestic activities as long as the total loss is, as in the United Kingdom system, available to carry forward against future profits. Only where it is clear at the time of the claim that the loss can never be used (e.g.
Companies in territories which operate a credit system in relation to United Kingdom branch income and which allow United Kingdom branch losses to reduce the total profits taxable will generally not be able to surrender losses. This will still apply where the overseas company also makes a loss on its domestic activities as long as the total loss is, as in the United Kingdom system, available to carry forward against future profits. Only where it is clear at the time of the claim that the loss can never be used (e.g. because the company is in liquidation and any possibility of an overseas form of group relief has been ruled out), will the United Kingdom branch loss be available for surrender. It is not sufficient that relief available overseas is not in fact claimed.
Countries which operate a credit system for United Kingdom branch profits and which allow United Kingdom branch losses to reduce non-United Kingdom profits include Finland, Denmark, Norway, Sweden, Spain, Italy, Austria, United States, Ireland, Canada (other than for companies carrying on life assurance business, where an exemption system operates) and New Zealand. (Some of these countries may apply an exemption system to profits or losses arising through branches in territories other than the United Kingdom depending on the terms of the treaty between the two countries.)
Group relief is available where the company is resident in an exemption territory, but only where the loss arising in the permanent establishment cannot be set against other profits (whether or not it is recouped at a later date).
In France a loss in a United Kingdom permanent establishment cannot be relieved against French taxable profits, unless (a) the company has elected to join one of the consolidation systems and calculates its tax base by including the results of foreign operations, or (b) the company benefits from the special provision for overseas investment, whereby a provision equal to the first four years of branch tax losses is relievable against the company's other profits. Where neither of the above applies, group relief is available.
Although the Netherlands operates an exemption system, losses of overseas permanent establishments are nevertheless available for set-off against domestic income of the company after being set first against non-taxable foreign source income. If the loss in the United Kingdom branch is entirely set against such non-taxable income in the Netherlands, group relief will be available in the United Kingdom. However, if the loss in the United Kingdom branch is available against domestic income (i.e. it exceeds profits in other foreign branches), group relief is not due.
While Switzerland does not tax foreign profits, it allows branch losses against domestic profits. Under both the Dutch and Swiss systems the tax relieved may eventually be recouped when the branch becomes profitable, but that will not make the losses available for United Kingdom group relief. In Switzerland a company can claim a lower rate on domestic income in lieu of deducting branch losses. A company that has elected to be taxed under that particular system can surrender the losses of its United Kingdom branch as group relief.
Although profits arising through a United Kingdom permanent establishment of a German company are exempt from German tax, any losses arising are deductible from the company's profits (as long as the branch is engaged exclusively in the active conduct of a business). Any loss which is relievable in this way is not available for United Kingdom group relief. The fact that the losses must be recouped when the permanent establishment subsequently realises profits does not affect the position.
Under Australian law, losses in United Kingdom permanent establishments are not relievable against other income, so United Kingdom group relief is available.
Luxembourg neither taxes United Kingdom branch profits nor allows losses. Belgium does not tax United Kingdom branch profits, but allows losses against taxable income after they have been set first against other non-taxable foreign income. Group relief will therefore be available for Luxembourg companies, but for Belgian companies it will only be available where no part of the loss is, or ever can be, set against taxable sources of income in Belgium.
Under United States law a company is taxed on its world-wide income and cannot therefore make a United Kingdom group relief claim on branch losses. Where, however, a United States group has elected to make a consolidated return, a branch loss cannot be consolidated into the return if the company is permitted to use those losses elsewhere. The effect of the tie-breaker at section 403D(6) is that, where deductibility of a loss overseas depends on whether the loss is deductible in the United Kingdom, the loss is treated as deductible overseas. So the loss is not available for surrender as group relief. This is in line with the internationally recognised principle that the country of residence has primary responsibility for relieving losses.
Countries which operate a credit system for United Kingdom branch profits and which allow United Kingdom branch losses to reduce non-United Kingdom profits include Finland, Denmark, Norway, Sweden, Spain, Italy, Austria, United States, Ireland, Canada (other than for companies carrying on life assurance business, where an exemption system operates) and New Zealand. (Some of these countries may apply an exemption system to profits or losses arising through branches in territories other than the United Kingdom depending on the terms of the treaty between the two countries.)
Group relief is available where the company is resident in an exemption territory, but only where the loss arising in the permanent establishment cannot be set against other profits (whether or not it is recouped at a later date).
In France a loss in a United Kingdom permanent establishment cannot be relieved against French taxable profits, unless (a) the company has elected to join one of the consolidation systems and calculates its tax base by including the results of foreign operations, or (b) the company benefits from the special provision for overseas investment, whereby a provision equal to the first four years of branch tax losses is relievable against the company's other profits. Where neither of the above applies, group relief is available.
Although the Netherlands operates an exemption system, losses of overseas permanent establishments are nevertheless available for set-off against domestic income of the company after being set first against non-taxable foreign source income. If the loss in the United Kingdom branch is entirely set against such non-taxable income in the Netherlands, group relief will be available in the United Kingdom. However, if the loss in the United Kingdom branch is available against domestic income (i.e. it exceeds profits in other foreign branches), group relief is not due.
While Switzerland does not tax foreign profits, it allows branch losses against domestic profits. Under both the Dutch and Swiss systems the tax relieved may eventually be recouped when the branch becomes profitable, but that will not make the losses available for United Kingdom group relief. In Switzerland a company can claim a lower rate on domestic income in lieu of deducting branch losses. A company that has elected to be taxed under that particular system can surrender the losses of its United Kingdom branch as group relief.
Although profits arising through a United Kingdom permanent establishment of a German company are exempt from German tax, any losses arising are deductible from the company's profits (as long as the branch is engaged exclusively in the active conduct of a business). Any loss which is relievable in this way is not available for United Kingdom group relief. The fact that the losses must be recouped when the permanent establishment subsequently realises profits does not affect the position.
Under Australian law, losses in United Kingdom permanent establishments are not relievable against other income, so United Kingdom group relief is available.
Luxembourg neither taxes United Kingdom branch profits nor allows losses. Belgium does not tax United Kingdom branch profits, but allows losses against taxable income after they have been set first against other non-taxable foreign income. Group relief will therefore be available for Luxembourg companies, but for Belgian companies it will only be available where no part of the loss is, or ever can be, set against taxable sources of income in Belgium.
Under United States law a company is taxed on its world-wide income and cannot therefore make a United Kingdom group relief claim on branch losses. Where, however, a United States group has elected to make a consolidated return, a branch loss cannot be consolidated into the return if the company is permitted to use those losses elsewhere. The effect of the tie-breaker at section 403D(6) is that, where deductibility of a loss overseas depends on whether the loss is deductible in the United Kingdom, the loss is treated as deductible overseas. So the loss is not available for surrender as group relief. This is in line with the internationally recognised principle that the country of residence has primary responsibility for relieving losses.
