The European Court of Justice (ECJ) has ruled in favor of the UK on cross border loss relief, rejecting a challenge by the European Commission and generally following the earlier opinion of the Advocate General.
The European Commission had suggested that the UK tax rules for cross border loss relief introduced after the Marks and Spencer decision made it virtually impossible in practice for groups to claim tax relief on losses made by subsidiaries in other EU member states and were not compatible with the principle of freedom of establishment. After asking the UK to change its rules the Commission referred the matter to the ECJ.
The ECJ found that although the UK applied different rules to cross border loss relief compared to losses surrendered between UK companies this was done in a proportionate way.
The ECJ rejected a suggestion by the European Commission that the rules meant the subsidiary would need to be wound up before the end of the accounting period in which the losses were occurred, to qualify for cross border loss relief. The ECJ found that an assessment as to whether the losses were definitive needed to be made immediately after the end of the accounting period in which the losses were sustained and did not imposes any requirement for the subsidiary to be wound up before the end of that accounting period. The losses would be definitive if the subsidiary did not have any income in its home state, as this was an indication that future profits were in that state against which the losses could be offset.
The ECJ leaves UK companies in the same position as they were before. An assessment as to whether the losses are definitive should be made as soon as possible after the end of the accounting period in which the losses are sustained.