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The European Commission has decided to refer the UK to the European Court of Justice (ECJ) for improper implementation of the ruling in Marks & Spencer plc v Halsey (Case C-446/03) [2006] STC 237 on cross-border loss relief.
In that case, the ECJ said that it is disproportionate to prohibit a UK parent company from deducting the losses of its non-resident subsidiary when the latter has exhausted all possibilities for relief in its state of establishment.
The UK subsequently amended the relevant legislation allowing relief for definitive losses of a subsidiary established in another member state.
However, according to the Commission, the conditions imposed make it virtually impossible in practice for the taxpayer to benefit from cross-border relief in accordance with the Marks & Spencer judgment.
This therefore renders the UK legislation incompatible with the freedom of establishment, guaranteed by articles 43 and 48 of the EC Treaty and articles 31 and 34 of the EEA Agreement.
‘These challenges focus on the restrictive interpretation placed by HMRC on the ECJ’s decisions in order to limit taxpayers’ entitlements and effectively limit their rights to establish operations in other EU member states’, said Berwin Leighton Paisner’s Liesl Fichardt.
‘The new proceedings will enhance the arguments of corporations which have made claims for cross-border group relief, that the UK rules are still not compatible with European Community law.’
She went on to say that clients are being advised ‘to assess their positions and to file protective claims where they have not yet done so’.
