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Brussels, 18 September 2008

Corporate taxation: Commission requests the United Kingdom to properly implement an ECJ ruling on cross-border loss compensation

The European Commission has sent the United Kingdom a formal request to properly implement the European Court of Justice (ECJ) judgment in Marks & Spencer on cross border loss compensation. In the legislation meant to implement the Marks & Spencer ruling, the United Kingdom imposes conditions on cross border group relief which make it virtually impossible for tax payers to benefit from the relief. The Commission considers that this is contrary to the EC Treaty. The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty. If the United Kingdom does not reply satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the European Court of Justice.

In the Marks & Spencer ruling (Case C-446/03 of 13 December 2005) the Court ruled that the UK ban on cross border loss relief was disproportionate, in so far as it denied loss relief where a non-resident subsidiary had exhausted all possibilities for relief in its state of establishment. Following this ruling, the UK should in principle grant relief for definitive losses of a subsidiary established in another Member State.

However, although the legislation has been amended, the UK still imposes conditions on cross border group relief which in practice make it impossible or virtually impossible for the tax payer to benefit from tax relief pursuant to the judgment in Marks & Spencer. This in particular concerns the following points:

  • An unnecessarily restrictive interpretation of the condition that there should be no possibility of use of the loss in the state of the subsidiary (paragraph 7 of Schedule 18A of the Income and Corporation Taxes Act (ICTA) 1988);
  • the date for determining whether the condition that there should be no possibility of use of the loss in the state of the subsidiary is met is set immediately after the end of the accounting period in which the loss arises (Part 1, paragraph 7(4), of Schedule 18A ICTA 1988);
  • the time limit to claim for group relief for losses made by subsidiaries established in other Member States is set at twelve months (extended in case of enquiries by the Revenue) after the filing date for the company tax return of the claimant company(Schedule 18, paragraph 74, of the Finance Act 1998);
  • the legislation states that it applies only to losses incurred after 1 April 2006 (Part 3 of Schedule 1 of the Finance Act 2006).

According the Commission these conditions make the new 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.

The Commission's case reference number is 2007/4026.

For the press releases issued on infringement procedures in the taxation or customs area see:

For the latest general information on infringement measures against Member States see:

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