European Court Official “suggests freedom of establishment should be restricted”

European Court Official “suggests freedom of esta...

The Court of Justice of the European Union comments on Advocate General’s Opinion on the long-running M&S tax case.

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  • Advocate General’s Opinion in long-running “M&S” tax case appears to suggest that fundamental principle of freedom of establishment should be restricted, according to KPMG in the UK

Commenting on the Advocate General’s Opinion today issued by the Court of Justice of the European Union on the long-running M&S tax case, Chris Morgan, head of tax policy at KPMG in the UK, said:

“In the original M&S case, the European Court found that a UK company investing in a foreign EU subsidiary was objectively comparable to a UK company investing in a UK subsidiary. Therefore the principle of freedom of establishment in the EU treaty meant there should be no discrimination between the two cases because as a UK parent company could claim tax relief for the losses of its UK subsidiary it meant it should also be able to claim losses from a foreign subsidiary. However in order to protect the UK tax base the Court said cross border relief should only be available if the loss could not be used in the foreign country.

“Advocate General Kokott now wants the Court to overturn its original ruling. She thinks that a UK company investing overseas is not in the same position as one investing in the UK and so can be subject to different rules – in this case barred from ever using the losses of a subsidiary. However, if this reasoning was true, it would go against a long line of cases concerning outward investment and would effectively open up the door to discrimination in cross border cases.

“It is ironic that while the new EU Commission is stating very firmly there will be no back tracking on the freedom of movement of workers and immigration as this is a fundamental right under EU law, an official of the European Court is suggesting the freedom of establishment should be restricted.”

Background to the case

On 15 July 2014 the Court of Justice of the European Union (CJEU) held the hearing for the European Commission’s infringement proceedings against the UK in respect of the lawfulness of the cross border group relief provisions that were introduced by Finance Act 2006.

Today the CJEU has issued its Advocate General’s Opinion on this case. The CJEU’s final judgment will be issued following today’s Opinion. The precise timing is not known but may take several months in KPMG’s view.

The CJEU’s judgment that will follow today’s Opinion will be significant for UK taxpayers with existing cross border group relief claims as well as those considering new claims in all periods that follow the introduction of the FA 2006 rules.

To date HM Revenue & Customs have expressed the view that the introduction of the FA 2006 rules made the UK’s group relief regime compatible with EU law following the landmark judgment in the Marks & Spencer (M&S) case from December 2005 which showed the UK’s domestic rules (pre-FA 2006) were contrary to the EU Treaty.

The rules introduced by FA 2006 allowed for cross border group relief claims in principle, but only in extremely limited circumstances that were impossible for taxpayers to satisfy in many cases - essentially the ‘no possibilities test’ (NPT) needed to be satisfied at the end of the period in which the losses arose. The EU Commission had challenged the rules on the basis that this condition was too restrictive. AG Kokott believes the restriction is legitimate because the UK should be under no obligation to grant cross-border group relief in the first place.

Interestingly, in the recent conclusion of the long running series of M&S cases going through the UK courts which considered the old rules and how the European Court’s initial judgment should be interpreted, the two Supreme Court judgments of 2013 and 2014 held that the NPT should be assessed at the date the claim for cross border group relief is actually made by the taxpayer and not the end of the period in which the losses arose.


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About KPMG

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 11,500 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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