The UK taxpayer had made various consortium claims for group relief in its tax returns, in respect of losses incurred by the UK branch of a Dutch joint venture company forming part of the same group. The claims were refused on the basis that these losses could have been taken into account in the taxation of the company in the Netherlands.
The ECJ’s judgment of 6 September 2012 held in favour of the taxpayer following the Opinion of AG Kokott delivered in April. The Court recognised that a domestic company and an overseas company with a UK-resident branch were in an objectively comparable situation and the restriction under domestic legislation was contrary to the freedom of establishment.
The restriction could not be justified by the preservation of the allocation of the power to tax since only UK losses incurred by the branch were to be surrendered against the profits of the UK taxpayer, or by the prevention of the double use of losses, which could not be raised as an independent justification. The UK’s power to impose taxes as the host member state was not impaired or limited by the fact that the losses might also be used in the Netherlands.
The ECJ also confirmed that the freedom of establishment extended sufficiently far so that the UK taxpayer in the main proceedings was protected and may have the benefit of the group relief set against its profits even though it was not the UK taxpayer itself which had established the Dutch JV company. In doing so the Court rejected HMRC’s argument that only the establishing company itself had exercised the freedom of establishment so that the imposition of a restriction on another entity was not affected by EU rights. Therefore it was irrelevant that it was not the UK taxpayer whose freedom of establishment had been unjustifiably restricted but an entity in another Member State (namely the Dutch joint venture company).