The UK Government introduced amended corporation tax group relief rules following the European Court of Justice's (ECJ) judgement in the Marks and Spencer (M&S) case. The new rules apply from 1 April 2006 and allow UK parent companies to claim group relief for losses suffered by their European subsidiaries in certain limited circumstances.
The European Commission has for a long time considered that the updated group relief rules do not fully reflect the ECJ's judgement. The Commission first issued a formal notice to that effect in July 2007 which was followed by reasoned opinions in September 2008 and November 2010. However, in October 2013, the Governments of Germany, Spain, the Netherlands and Finland came out in support of the UK Government's position and were granted leave to intervene in the proceedings.
As a result of this intervention, the ECJ was asked to rule on whether the Commission's objections were warranted. The Court issued its judgement on 3 February 2015, concluding that the restrictions present in the amended group relief rules are proportionate and justifiable.
The EU Commission's objections
The Commission had argued in its reasoned opinions that it is virtually impossible to successfully claim cross border group relief under the amended rules and that they would only apply in two situations:
- Where there is no provision in the tax rules of the statein which the loss-making company is resident to carry forward losses unused in the year they arise, or
- Where the loss-making subsidiary enters into liquidationbefore the end of the tax year in which the losses are incurred.
This is based on the Commission's interpretation of the 'no possibilities' test. Under this test, it is necessary to consider whether it is at all possible to use the losses concerned other than in the UK. Under the amended group relief rules, this test is to be applied as at the end of the period in which the losses arose. The Supreme Court has held, in relation to the group relief rules before the 2006 amendments but as construed in accordance with EU law, that this test should be applied at the time that the claim for group relief is made in the UK.
The Commission also criticised the fact that the new rules only apply from 1 April 2006 onwards.
The UK Government's position
The UK Government argued that the requirement to consider the no possibilities test at the end of the year of loss does not make it necessary for the subsidiary to have been put into liquidation before the end of that year. If there is evidence of an intention to wind up the subsidiary and the liquidation process commences soon after the end of the year, this would be taken into account in determining whether the losses are available. Similarly, if the subsidiary ceases trading immediately after the year of the loss and disposes of all of its income producing assets, this would also be an indication that there were no possibilities for using the losses outside the UK.
The ECJ's decision
The ECJ accepted the additional circumstances set out by the UK Government in which the losses might be available to use in the UK and, on that basis, rejected the EU Commission's objections with regards to the timing of the 'no possibilities' test.
It also dismissed the EU Commission's complaint that the new rules only apply from 1 April 2006. It accepted that the old group relief rules, as construed in accordance with EU law following the M&S judgement, provided for the possibility of cross-border group relief. Indeed, as mentioned above, such rules might be said to be more generous as, based on the Supreme Court's judgement, the no possibilities test is to be considered at the time the claim for loss relief is made and not immediately after the end of the year of the loss.
Conclusion
As a result of the ECJ's judgement it seems unlikely that the UK's cross border group relief rules will be amended or expanded for the foreseeable future. Nevertheless, it indicates that HMRC might be prepared to accept that the no possibilities test is met in a wider set of circumstances than was previously thought. The fact that it does not appear to be necessary for the company to be put into liquidation either or before or after the end of the year of the loss is particularly helpful.
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