UK cannot require companies to be UK resident to transfer losses, ECJ holds


By Alistair M. Nevius, J.D.

A UK law requiring all companies involved in a transfer of losses to be established in the UK to qualify for tax relief was struck down by the European Court of Justice, which held that the legislation infringes on the EU’s principle of freedom of establishment (Felixstowe Dock and Ry. Co. Ltd. v. Her Majesty’s Rev. and Customs, No. C-80/12 (E.C.J. April 1, 2014)). The holding should allow multinational companies doing business in Europe greater freedom in transferring losses among group or consortium members for tax purposes.

UK law allows one company’s losses to offset the taxable profits of another company if the two companies are members of the same group (Income and Corporation Taxes Act, 1988, §402). A group of companies, for these purposes, means companies owned, directly or indirectly, by a common parent. Losses can also, in certain cases, be transferred from a company that is a member of a consortium to another company owned, directly or indirectly, by the consortium. A consortium is a temporary collaboration among companies for the purpose of achieving a common goal.

Where one company (called a link company) is both a member of a group and a member of a consortium, UK law in certain cases allows transfers of losses from a group member to a consortium member.

In all cases, losses can be transferred between companies only if the transferring and transferee companies are UK residents or have a UK permanent establishment.

In this case, a UK loss company, Hutchison 3G UK Ltd., sought to transfer those losses to other UK companies in a consortium. However, the link company, Hutchison 3G UK Investment Sàrl, was a Luxembourg company, and the UK tax authorities disallowed the loss transfer because the link company was neither a UK resident nor had a UK permanent establishment.

The tax authorities’ decision was challenged in UK court (the First-Tier Tribunal (Tax Chamber)), and that court sought a judgement from the European Court of Justice (ECJ) on whether the UK law is compatible with freedom of establishment.

Freedom of establishment, under Articles 49 and 54 of the Treaty on the Functioning of the EU, includes the right of EU nationals (including companies) to conduct business within any EU member state under the conditions laid down by that member state for its own citizens.

The ECJ held that the law violates freedom of establishment because it treats UK companies connected by a UK link company differently from UK companies connected by a non-UK link company. Because that difference in treatment makes it less tax advantageous to set up a link company in another EU member state, it constitutes a restriction on freedom of establishment, the court held.

The court noted that the UK government had not put forward any overriding reasons in the public interest that might justify restricting freedom of establishment. The court nevertheless considered that the restriction might be justifiable as a means of preserving powers of taxation among the EU member states or as a way to combat tax havens. However, the court found that such justifications were not sufficient to justify the law’s restriction on freedom of establishment.

Alistair M. Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.

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