The EC Commission's long awaited communication on cross border group relief was finally issued just before Christmas. Please contact us should you wish a copy. The communication represents the Commission’s formal word on the Marks & Spencer group relief case and its recommendations to member states as to the form of legislation to permit cross border group relief or consolidation in the circumstances now permitted by community law. It does not have the force of legislation, but expresses the Commission's view.
You will recall that the Commission has long maintained that the denial of cross border group relief acts as a major obstacle to cross border trade in the community. It released as long ago as 1990 a draft Directive proposing a legislative framework to permit cross border group relief. At that time it proposed a mechanism which would enable companies within the same group to surrender losses freely cross border, subject to a clawback when and if the losses were used in the jurisdiction in which they arose. It was perhaps not surprising therefore that the Commission supported the tax payer in the Marks & Spencer group relief case before the ECJ.
As you know, the ECJ concluded in the Marks & Spencer case that national rules which prevent the cross border surrender of the loss are not precluded by community law where they follow the three fold objectives of allocating taxing powers, preventing the double use of losses and preventing groups from "loss shopping" (ie. transferring losses to the states where their tax rates were the highest). However, the ECJ concluded that the UK's group relief rules were incompatible with community law, because while pursuing those objectives they went too far. They prevented the cross border surrender of losses, even in circumstances where those losses had no possibility of use in the jurisdiction in which they arose. Much discussion has concerned the interpretation of that condition and which has of course become the subject of ongoing litigation.
The following observations of relevance can be taken from the Commission's Communication, most of which claimants will find encouraging:
- The Commission's description of the judgment requires these three justifiable objectives all to co-exist and describes the judgment as concluding that the UK group relief system offended the principle of proportionality because it went too far. This is a helpful observation and accords not only with our own but opinions already expressed by Advocate Generals Maduro and Kokott. It may mean that an argument can be raised that the UK's provisions are precluded also in circumstances unlike M&S but where all three objectives do not appear. For instance, if we can show that there is no "loss shopping" nor any risk of double dipping, the Commission's approach may well assist an argument that a cross border loss can still be surrendered even where not terminal (as in the M&S context).
- The Commission sees cross border group relief and cross border group contributions as the same in principle. This would seem to suggest that the Commission believes that the Oy AA case (concerning Finnish group contribution payments made to a UK parent) should be decided in a similar manner to the Marks & Spencer case. Curiously however, at the oral procedure in the Oy AA case, the Commission opposed the tax payer.
- Interestingly, in the technical annex which accompanies the Communication, the Commission lists the states of Europe with group relief, group contribution and other forms of group consolidation systems. In its list of the member states who have adopted systems of cross border group relief, it does not include the UK. Whether this is a tacit observation on the unrealistically restrictive nature of the changes introduced to group relief in Finance Act 2006 is thought provoking.
- One of the issues which arises not only in this context, but in other cases where the ECJ has concluded that provisions are disproportionate, is how to apply those provisions in the light of that judgment. Is the restriction on the cross border transaction simply to be ignored where the provisions are disproportionate? Here the Commission makes an observation that Member States who have adopted systems of cross border group relief have required different sets of rules to be introduced to deal with the cross border circumstance as opposed to domestically. In other words, it has proved difficult to shoe horn into a system designed for domestic group relief, cross border movements. This would seem to assist the argument that in such circumstances the restriction is simply to be disapplied.
- Most significantly the Commission's interpretation of when a loss will be beyond local use does not require the loss to be terminal. Rather, they propose a recapture system. Their suggestion to deal with the condition in the Marks & Spencer judgment that the tax payer show the loss is beyond possible use in the local jurisdiction is merely to require the loss only to be incapable of "immediate" use in the jurisdiction in which it arises.
- The only negative point from the perspective of tax payers in the Commission's Communication is the suggestion that the threefold objectives mentioned above can be achieved by a cross border group relief system, which restricts cross border group relief only to vertical movements (ie. losses from subsidiary to parent). They comment that a system which permitted losses to be surrendered only from a subsidiary to a parent would prevent prospects of double dipping, loss shopping etc, presumably because a company group is less able to determine the location of its parent company than its subsidiaries.
- While this would appear to be a negative observation from the perspective of tax payers, it does represent only one suggestion by the Commission as to how to overcome the problem. If the three objectives do not arise in another circumstance and the rules do not properly provide for cross border group relief, there is no reason why claims still cannot be made.
- Unhappily, the Commission appears to dodge the question as to whether the loss should be computed on a local basis or on the basis of the recipient jurisdiction to which it is being surrendered cross border. The Commission merely says that systems need to take significant differences in tax rates and accounting rates into account.