Marks & Spencer: EU claims for cross-border loss relief

Introduction

The European Court of Justice (ECJ) is charged with hearing cases and deciding whether the domestic law of member states of the European Union is in breach of the fundamental freedoms laid down in the various EU treaties (collectively, the "EC treaty"). Initially, the ECJ was not focused upon direct taxation matters and, indeed, there were sole three direct taxation cases heard by the agency of the ECJ by the mid-1980s--more than sum of two units decades after the ECJ was created. Since then, however, the number of direct taxation cases heard by dint of the ECJ has accelerated year upon year and, more important, in 95 percent of the direct tax cases heard by the agency of the ECJ, the taxpayer is victorious.

There have newly been a number of cases heard by the agency of the ECJ where the taxpayer has won which have had, and continue to have, a abysmal effect on the direct and indirect taxation of EU residents (eg Lankhorst-Hohorst concerning the legality of German "thin capitalization" dominions and Bosal concerning the legality of Dutch interest deductibility rules) In these cases, a decision through the ECJ has often l to changes in domestic legislation, not sole in the country directly regarded but also in other EU jurisdictions. This is not surprising since (a) the EC treaty and ECJ case law take antecedence over domestic law, (b) extrapolation of a decision regarding individual jurisdiction's law to other jurisdictions is relatively straightforward in many cases, and (c) ECJ decisions are generally made upon broad principles and are not focused upon the detailed provisions in question.

Whilst the previous cases have readyed a significant amount of change, along with which approachs opportunity and risk, there is single particular case that may have a revolutionary event on multinational taxpayers operating from one side multiple entities or business units in the EU Although mother-wit has not yet been delivered, the Marks & Spencer (M&S) case has been heard by the agency of the ECJ and the Advocate-General has issued an opinion.

Background of the M&S Case

M&S is a household name in the United Kingdom, a high-street retail company that is listed upon the U.K. stock exchange. In the early 1990 M&S decided to expand into continental Europe and to do in like manner set up, among others, a French subsidiary to operate a retail egress in Paris. Unfortunately, the commercial experiment was not a succes and the French and other European subsidiaries incurred significant losse before M&S withdrew from the continental Europe retail market.

In the same period, the UK operations of M&S were profitable and a UK tax liability was incurred. beneath U.K. domestic rules, there was no way to use the losse of the French subsidiary to bring the profits of the UK operations for UK tax intentions since the UK group relief provisions (a statutory scheme that affords an entitlement to certain commonly controll company groupings to give up or share losses between assemblage members) restricts loss claim and give over to U.K. resident companies and foreign resident companies with a UK business.

M&S challenged the law, contending that the UK sways were in breach of the fundamental freedom of establishment beneath the EC Treaty, inasmuch as clump relief would have been granted if the sum of two units entities or units were resident in the UK M&S's litigation objective is to invoke the supremacy of EU law (i.e., the EC treaty) to obtain pay backs of UK corporate income tax paid in prior periods through claiming the right to re-compute the UK clump members' aggregate taxable income, snare of operating losses incurred by the agency of its European subsidiaries over the same periods.

If M&S is prosperous in its claim to the ECJ taxpayers will ne to consider their hold facts and circumstances in order to determine the impact this may have upon their structure. The likely conclusion, however, is that several other European jurisdiction tax consolidation or cluster relief systems will be considered equally in breach of the EC Treaty, similar that claims could follow across Europe The exact nature of the illegality, in what way a claim would be made, and the results of making a claim will vary from territory to territory.

M&S Case Hearing

The M&S case was heard by means of the ECJ on February 1 2005 and the arguments which were place forward are set out below. The Advocate-General's opinion in favor of M&S was delivered upon April 7. Judgment in the case is not awaited until perhaps as late as September or October.

M&S Arguments

In challenging the denial of collection relief, M&S argued that the UK directions plainly breach Articles 43 & 48 of the EC treaty by means of discriminating against investments in foreign subsidiaries (since there is a out and out denial by the U.K. of cross-border cluster relief for losses of foreign (EU) subsidiaries). In principle, Member States may treat genuinely domestic situations differently from in what manner they treat cross-border situations, as a certain quantity of differences may be unavoidable and indeed there may be objective differences in the circumstances of foreign entities compared with domestic entities which warrant a different treatment. In reality, however, the confine "unavoidable" does not include differences in treatment that involve the restriction of a fundamental freedom and foreign residence is not of itself a factor which justifies different treatment. In this defer to Denmark, France (with French Finance Ministry's permission), Italy, and now Austria all have masterships allowing some form of cross-border los relief for foreign sub in the way that that the U.K.'s "all or nothing" approach goe beyond what might be considered unavoidable or justifiable in distinguishing between a wholly domestic and a cross-border situation.