62012CC0080
OPINION OF ADVOCATE GENERAL
JÄÄSKINEN
delivered on 24 October 2013 (
1
)
Case C‑80/12
Felixstowe Dock and Railway Company Ltd,
Savers Health and Beauty Ltd,
Walton Container Terminal Ltd,
WPCS (UK) Finance Ltd,
AS Watson Card Services (UK) Ltd,
Hutchison Whampoa (Europe) Ltd,
Kruidvat UK Ltd,
Superdrug Stores plc
v
The Commissioners for Her Majesty’s Revenue and Customs
(Request for a preliminary ruling from the First-Tier Tribunal (Tax Chamber) of the United Kingdom)
‛Interpretation of Articles 43 EC and 48 EC — Freedom of establishment — Tax legislation — Corporation tax — Tax relief — Consortium claim for group relief (consortium relief) — National legislation excluding the transfer of losses within the national territory by one consortium company to another company belonging to a company group to which a ‘link company’ that is also a member of the consortium belongs — Residence requirement imposed on the link company — Discrimination according to the place of the corporate seat — Ultimate parent in third country — Corporate ties passing through third countries’
I – Introduction
1.
In the United Kingdom a company can transfer losses for tax purposes to another company to which it is linked by certain corporate ties. This reference from the First-Tier Tribunal (Tax Chamber) concerns primarily the question whether in terms of European Union (EU) law there is a restriction on freedom of establishment if such surrendering of losses is not possible when the company, which acts as the link between (i) the company surrendering the losses and (ii) the receiving company, is resident in another Member State. The national court also asks whether, in terms of EU law, the situation is any different if the link between companies passes through companies in third countries.
2.
The group relief tax scheme in the United Kingdom allows losses to be surrendered between different companies within a group of companies (
2
) and/or a consortium, (
3
) and thereby allows the optimal use of those losses for tax purposes without, however, leading to consolidation of the group or the consortium to a single economic entity for tax purposes. (
4
)
3.
The Court is again faced with the question whether the exclusion of certain taxpayers from the United Kingdom group relief tax scheme is compatible with the freedom of establishment. In ICI the exclusion from the group relief scheme concerned a domestic holding company which operated mainly foreign subsidiaries, in Marks & Spencer it concerned foreign subsidiaries and in Philips Electronics UK it concerned the permanent United Kingdom establishment of a company resident in another Member State. (
5
)
4.
At first sight, what appears to be the novelty of the present case is the fact that the corporate ties pass through third countries and that the ultimate parent (
6
) is resident in a third country. However, in the final analysis, for the purposes of assessing in the present case the conformity of the United Kingdom legislation with EU law, that question may not be decisive.
5.
Moreover, whether there is an issue of EU law depends partly on the factual premiss regarding the existence of a usual practice in the United Kingdom whereby consideration is generally paid when losses are surrendered between companies. This is because the present case is based on the assumption that a surrendering company will suffer if it cannot transfer the losses to claimant companies in return for consideration. Such economic disadvantage will occur only if the surrendering company suffers a cash-flow disadvantage because of its inability to capitalise the losses immediately without having to wait for later financial years. If, however, the surrender of losses took place without any compensation, any disadvantage stemming from the United Kingdom legislation would be felt only at group level and not at the level of the surrendering company.
II – National law, facts, procedure and the questions referred
A – United Kingdom legislation
6.
The national provisions applied in the main proceedings are in the Income and Corporation Taxes Act 1988 (ICTA).
7.
‘Group of companies’ is defined as follows in section 413(3) ICTA: two companies are deemed to be members of a group of companies if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company.
8.
ICTA provides for two types of group relief: group claims for group relief (which were at issue in Marks & Spencer) and consortium claims for group relief (‘consortium relief’) (which were at issue in ICI and Philips Electronics UK and are at issue in this case).
9.
According to section 402 ICTA, relief for trading losses and other amounts eligible for relief from corporation tax may be surrendered by a company (‘the surrendering company’) and, on the making of a claim by another company (‘the claimant company’), may be allowed to the claimant company by way of a relief from corporation tax called ‘group relief’. Subsection 3 of that provision provides that, on the making of what is called a ‘consortium claim’, group relief is also to be available in the case of a surrendering company and a claimant company, inter alia, where one of them is a member of a group of companies and the other is owned by a consortium and another company is a member of both the group and the consortium.
10.
According to subsection 3A of section 402 ICTA, group relief is not available unless the condition laid down in subsection 3B, namely that the company is resident in the United Kingdom or is a non-resident company carrying on a trade in the United Kingdom through a permanent establishment, is satisfied in the case of both the surrendering company and the claimant company.
11.
Section 406(1) ICTA contains three definitions. ‘Link company’ means a company which is a member of a consortium and is also a member of a group of companies. ‘Consortium company’, in relation to a link company, means a company owned by the consortium of which the link company is a member. ‘Group member’, in relation to a link company, means a company which is a member of the group of which the link company is also a member but is not itself a member of the consortium of which the link company is a member.
12.
According to section 406(2) ICTA, ‘where the link company could … make a consortium claim in respect of the loss or other amount eligible for relief of a relevant accounting period of a consortium company, a group member may make any consortium claim which could be made by the link company’, corresponding to the same fraction of the losses surrendered as if the link company were the claimant company.
13.
The combined effect of section 402(3A) and (3B) and of section 406(2) ICTA is that the link company for the purposes of consortium relief has to be a company resident in the United Kingdom or a non-resident company carrying on a trade in the United Kingdom through a permanent establishment. In other words, the link company as well as the surrendering and claimant companies must be liable to United Kingdom corporate tax.
B – The company group and the consortium
14.
In the present case Felixstowe Dock and Railway Company Ltd and others are the ‘claimant companies’. (
7
) They are all members of the Hutchison Whampoa Group, whose ultimate parent is Hutchison Whampoa Ltd, a company incorporated and resident in Hong Kong, which indirectly owns 100% of the shares in the claimant companies. (
8
)
15.
Hutchison 3G UK Ltd is the ‘surrendering company’. It was 100% owned by Hutchison 3G UK Holdings Ltd.
16.
Hutchison 3G UK Holdings Ltd was the consortium company. During the relevant period Hutchison 3G UK Holdings Ltd was owned by a consortium composed of Hutchison 3G UK Investments Sàrl, a Hutchison Whampoa Group company incorporated and resident in Luxembourg (50.1%), three other Hutchison Whampoa Group companies incorporated and resident in the British Virgin Islands (for a total of 14.9%), and two other companies unrelated to the Hutchison Whampoa Group (20% and 15%, respectively).
17.
Hutchison 3G UK Investments Sàrl was the ‘link company’, acting as connector between the group and the consortium. It was wholly owned by Hutchison Europe Telecommunications Sàrl, a company incorporated and resident in Luxembourg. (
9
) Both companies are indirect 100% subsidiaries of Hutchison Whampoa Ltd. Further ties connecting the link company to Hutchison Whampoa Ltd pass through various intermediate holding companies incorporated in Luxembourg and outside the EU/EEA (Hong Kong, the British Virgin Islands and Cayman Islands).
C – The main proceedings and the questions referred
18.
The surrendering company carried on business as a mobile telephony operator. It incurred considerable expense in setting up its system and thus suffered substantial losses in its first years of operation. During the relevant period, for the purposes of section 406(1)(b) ICTA, the surrendering company was owned by the consortium company as explained above.
19.
The claimant companies, having made trading profits during the same period, sought to use the losses of the surrendering company. According to the order for reference, the surrendering company was, pursuant to an arrangement within the Hutchison Whampoa Group, entitled to receive 30 pence for every £1 of losses surrendered. The claimant companies were ‘group members’ within the meaning of section 406(1)(c) ICTA since they were indirect subsidiaries of Hutchison Whampoa Ltd, in which the latter held an interest of not less than 75%. (
10
)
20.
The claimant companies made claims for consortium relief under sections 402(3) and 406 ICTA. Their claims were refused on the ground that the link company (which was in no way directly involved in these proceedings), was not resident in the United Kingdom, but in Luxembourg. It could not transmit a right to make a claim for consortium relief to another group member under section 406(1) ICTA because it had no right to make such a claim itself, by virtue of the exclusion contained in section 402(3B).
21.
Following referral of the case to the First-Tier Tribunal (Tax Chamber), the latter decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
‘1.
In circumstances where:
(1)
the provisions of a Member State (such as the United Kingdom) provide for a company (a “claimant company”) to claim group relief for the losses of a company that is owned by a consortium (a “consortium company”) on the condition that a company that is a member of the same group of companies as the claimant company is also a member of the consortium (a “link company”), and
(2)
the parent company of the group of companies (not itself being the claimant company, the consortium company or the link company) is not a national of the United Kingdom or any other Member State,
do Articles 49 TFEU and 54 TFEU [formerly Articles 43 EC and 48 EC] preclude the requirement that the “link company” be either resident in the United Kingdom or carrying on a trade in the United Kingdom through a permanent establishment situated there?
2.
If the answer to question 1 is yes, is the United Kingdom required to provide a remedy to the claimant company (for example, by allowing that company to claim relief for the losses of the consortium company) in circumstances where:
(1)
the “link company” has exercised its freedom of establishment but the consortium company and the claimant companies have not exercised any of the freedoms protected by European Law,
(2)
the link(s) between the surrendering company and the claimant company consists of companies not all of which are established in the EU/[European Economic Area (EEA)].’
22.
Written observations were lodged by the Felixstowe Dock and Railway Company and Others, by the German, French, Netherlands and United Kingdom Governments as well as by the European Commission. A hearing was held on 3 September 2013 in which oral submissions were made by each of those parties except for the French Government.
III – Analysis
A – Preliminary observations
23.
The two questions asked by the referring court concern the freedom of establishment. I will base my analysis on Articles 43 EC and 48 EC, since Articles 49 TFEU and 54 TFEU are not applicable ratione temporis to the situation in the main proceedings.
24.
For the purposes of this analysis, I will discuss the two questions together. In substance the referring court asks, in the first place, whether in the situation at issue in the main proceedings, Articles 43 EC and 48 EC preclude the requirement that, for the purposes of the consortium relief scheme, the link company be either resident in the United Kingdom or carrying on a trade in the United Kingdom through a permanent establishment. In the second place, it enquires whether those articles prohibit a Member State from requiring that the lowest common parent within a group of companies to which the link company and the companies receiving the losses for tax purposes belong be resident in a Member State or an EEA State, or that the connections between the link company and the companies receiving the losses for tax purposes consist solely of such companies. Finally it asks whether a remedy such as allowing consortium relief for the claimant companies must be available if the United Kingdom rule infringes the freedom of establishment.
25.
It should be made clear at the outset that this case does not relate to the allocation of powers of taxation between the Member States even though, as the observations of the German and French Governments demonstrate, it is feared that the outcome of this case might jeopardise their competence to tax international groups of companies under the control of third country parent companies.
26.
Indeed, the present case is about the transfer of losses from one United Kingdom company liable to United Kingdom corporation tax with the aim of setting them off against profits earned by another United Kingdom company also liable to United Kingdom corporation tax in that Member State. There is thus no issue of cross-border surrendering of losses between companies resident in different Member States, which would raise the question of the allocation of powers of taxation, as was the case in National Grid Indus (
11
) and Philips Electronics UK. (
12
) The present case is only about whether the surrendering of losses from one United Kingdom company to another consortium member may, for the purposes of consortium relief, be made subject to the requirement that the link company is a United Kingdom company or has a permanent establishment in the United Kingdom.
27.
In this context it is useful to refer to the three stages of development of the United Kingdom legislation on group relief. Until 1 April 2000 (that is, before the period relevant to the present proceedings), a claim for group relief between two sister companies was not allowed if their parent company was not resident in the United Kingdom. However, since 1 April 2000 (the period relevant to the present proceedings), companies belonging to the same group have been able to transfer losses between themselves irrespective of the residence of their parent. It follows that if the Hutchison Whampoa Group had (indirectly) held at least 75% of the surrendering company during the relevant period, instead of the 65% it actually held, there would have been no obstacle to the use by the claimant companies of the losses of the surrendering company, since it would have been a group member for the purposes of section 402(1) and (2) ICTA. In 2010, subsequent to the period to which the main proceedings relate, the United Kingdom group relief rules were amended by the Corporation Tax Act 2010, enabling a company established in the EU/EEA to serve as a link company. However, the new rules require the link company and the claimant companies to be members of the same group without the involvement of a non-EU/EEA company.
28.
Consequently, if the Court were to find that there is a prohibited restriction of fundamental freedoms, the United Kingdom legislation in question could not be justified by reference to the need to preserve the allocation of powers of taxation between the Member States. Nor could cohesion of the tax system be invoked as a justification in view of the legislative developments described above which have made group relief available irrespective of the nationality of the parent or group companies other than the surrendering company and the claimant company. In fact, the United Kingdom does not put forward any justification for the national rule as amended because, in its submission, the situation in the main proceedings falls outside the scope of EU law. (
13
)
29.
It should also be recalled that according to the case-law, although direct taxation falls within the competence of the Member States, that competence may not be exercised in conflict with EU law, and more particularly the fundamental freedoms guaranteed in the Treaties. As Advocate General Kokott has observed, under EU law the Member States are, in principle, not required to provide in their corporation tax legislation for group relief for losses because the formulation of the tax system is a matter for each Member State. However, in so far as such a right is provided, it must be provided in a manner consistent with the fundamental freedoms under EU law, especially with the freedom of establishment. (
14
)
B – Functioning of the group relief scheme
30.
In economic terms, group relief of the kind applicable in the United Kingdom enables the surrendering company to transfer its losses to the claimant company, which can deduct them from its taxable profits. This entails the surrendering company losing the possibility of using those losses for tax purposes, and more particularly the option of carrying the losses forward to subsequent financial years. (
15
)
31.
It seems that usual practice in the United Kingdom is for this surrender to take place in return for consideration, (
16
) which often corresponds to the value of the corporation tax saved because of the loss, even though there is no legal requirement for consideration, except, possibly, to the extent that the fiduciary duties of the surrendering company’s management under company law give rise to such a requirement. For example, in the present case the claimant companies have agreed to pay 30 pence per £1 for the losses surrendered.
32.
As the United Kingdom group relief scheme is not based on consolidating the profits and losses for tax purposes at the company group level, it is clear that a surrendering company, as an independent legal person with a profit-making objective, could normally not consent to surrender without compensation the losses that it could later use to minimise its own future taxes. By surrendering the losses against compensation that reflects the applicable corporation tax rate, the surrendering company monetises its losses earlier (and more surely), and thereby gains a cash-flow advantage.
33.
If the existing practice in the United Kingdom were not as described above, it would be difficult to see how a surrendering company could suffer any actual harm as the result of a legal rule preventing it from surrendering its losses to another company, in other words, from transferring assets having potential economic value as a counter-claim to future tax liabilities to an outsider for a consideration not reflecting their value in the hands of the surrendering company. It would be equally difficult to claim that a legal rule preventing a profit-seeking company from transferring its assets without due consideration would constitute a restriction of the freedom of establishment. Hence, in the absence of this factual background the disadvantages stemming from the United Kingdom legislation would not be felt at the level of the surrendering company but only by those companies which are higher in the group and the consortium than the surrendering company and the claimant companies, that is to say, at group level as a higher tax charge of the group as a whole.
34.
This cash-flow advantage, or the possibility of having such an advantage, is likely to increase the value of the surrendering company, and, correspondingly, of any shareholding in it. This means that the possibility of group relief is advantageous for the owners of the surrendering company, be they direct or indirect parents, or consortium members with minority shareholdings. (
17
)
35.
For a claimant company such a solution is financially neutral: it pays to the surrendering company a sum corresponding to the tax it avoids because of the surrender instead of paying the same sum to the treasury. However, since the United Kingdom legislation requires, also in the context of consortium relief, that the claimant company and the link company belong to the same group, the advantage the group gains from group relief explains the arrangements between the claimant companies and surrendering companies as at group level it leads to a lesser tax charge. (
18
)
C – Which fundamental freedom is relevant ratione materiae?
36.
In view of the criteria laid down in the Court’s case-law, it might appear doubtful whether the United Kingdom legislation relates to the freedom of establishment. For the freedom of establishment to be applicable, the Court has attached importance to the degree of control exercised over a given company. In the present case the degree of control required under national law can be anything from 5%, which hardly brings ‘control’, up to 74.99%. However, this issue seems to be resolved by the facts of the case as I shall explain below and freedom of establishment is also the context in which the referring court has situated the questions.
37.
Third country aspects relating to the complicated corporate structure of the Hutchison Whampoa Group raise the question as to whether the relevant United Kingdom legislation should be assessed in the light of the freedom of establishment, which is not applicable in relation to third countries, and/or in the light of the free movement of capital, which applies also in relation to such countries.
38.
The Court stated in Test Claimants in the FII Group Litigation (C‑35/11) that, as regards the question whether national legislation falls within the scope of one or other of the freedoms of movement, it is clear from well-established case-law that the purpose of the legislation concerned must be taken into consideration. National legislation intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company’s decisions and to determine its activities falls within the scope of the freedom of establishment. On the other hand, national provisions which apply to shareholdings acquired solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking must be examined exclusively in light of the free movement of capital. (
19
)
39.
In situations where it cannot be determined from its purpose whether the national legislation falls predominantly within the scope of Article 49 TFEU or Article 63 TFEU, the Court takes account of the facts of the case in point in order to determine whether the situation to which the dispute in the main proceedings relates falls within the scope of one or other of those provisions (my emphasis). (
20
)
40.
Here a distinction should be made between the two types of group relief available under United Kingdom law. In view of their purpose the United Kingdom rules on group claims for group relief clearly relate to those shareholdings which enable the holder to exert a definite influence on a company’s decisions and to determine its activities. They apply to companies which are at least 75% subsidiaries. The rules therefore fall within the scope of the freedom of establishment.
41.
As to the consortium claims for group relief the situation is less clear. Provisions on consortium relief apply in situations where at least 75% of the capital of the consortium company is held by consortium members, each owning not less than 5% and not 75% or more. (
21
) This covers situations where there is one dominant owner but also situations where there are many mutually independent shareholders. In theory there could be a consortium company with 20 shareholders each having a stake of 5%. From this a situation could arise in which there were 20 link companies and the consortium company could surrender its losses, in fractions of 5%, to 20 different company groups.
42.
In my opinion the United Kingdom provisions on consortium relief are not intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company’s decisions. As the claimant companies’ representative submitted at the hearing, the United Kingdom tax legislation does not require that any kind of legally defined collective control of the consortium company be exercised by the consortium members. (
22
) Therefore in my opinion holdings eligible for consortium relief could be regarded as direct investments and possible restrictions on them as restrictions of the free movement of capital. (
23
)
43.
However, the United Kingdom provisions also allow situations where the consortium company is under the control of a single company group. This is the situation of the surrendering company in the present case: 65% of that company is indirectly held by the Hutchison Whampoa Group (50.1% through the link company and 14.9% through three British Virgin Islands group companies). Consequently, the provisions in question are in principle capable of restricting the freedom of establishment and the situation at issue in the main proceedings should be regarded as falling within the scope of that fundamental freedom.
44.
In view of these considerations I take the view that the facts of the case fall within the scope of Article 43 EC, which justifies assessing the United Kingdom consortium relief scheme primarily in the light of the freedom of establishment.
D – Existence of a restriction on freedom of establishment
45.
Freedom of establishment, which Article 43 EC grants to EU nationals and which includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, under the conditions laid down for its own nationals by the law of the Member State where such establishment is effected, entails, in accordance with Article 48 EC, for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Union, the right to exercise their activity through a subsidiary, a branch or agency. As the second sentence of the first paragraph of Article 43 EC expressly leaves traders free to choose the appropriate legal form in which they wish to pursue their activities in another Member State, that freedom of choice must not be limited by discriminatory tax provisions. (
24
)
46.
United Kingdom legislation requires that the link company be resident in the United Kingdom or be a non-resident company carrying on a trade in the United Kingdom through a permanent establishment. This provision is clearly a restriction of freedom of establishment of the link company, which is established in Luxembourg, and its immediate parent company, which is also established in Luxembourg.
47.
The Court found in Marks & Spencer that ‘[g]roup relief such as that at issue in the main proceedings constitutes a tax advantage for the companies concerned. By speeding up the relief of the losses of the loss-making companies by allowing them to be set off immediately against the profits of other group companies, such relief confers a cash advantage on the group.’ (
25
) Does this mean that the disadvantage is felt only at group level, or by the ultimate parent, which in the present case is a third country undertaking? In my opinion not.
48.
As I explained above, at the factual level the United Kingdom group relief scheme sets off profits and losses within a group and/or a consortium, not by means of consolidated tax accounting or a transfer of taxable profits as a group contribution, but as arrangements whereby losses are surrendered in return for consideration, thus creating a cash-flow advantage for the surrendering company. If the surrender of losses and, consequently, consortium relief is not allowed because of the nationality of the link company, it is in the first place the surrendering company which suffers a financial disadvantage in the form of loss of cash-flow advantage. In the Court’s case-law such cash-flow disadvantage has been considered to be unfavourable treatment amounting to a restriction. (
26
) Disadvantage suffered by a company because of the residence status of the parent company was considered in Metallgesellschaft and Others sufficient to infringe the freedom of establishment. (
27
)
49.
This disadvantage is also felt by the owners of the surrendering company as a diminution of the value of their shareholdings irrespective of whether they represent controlling shareholdings, stable minority investments or portfolio investments. It is of course only the first one that is relevant from the point of view of freedom of establishment.
50.
Hence, in the present case the Luxembourg link company which indirectly holds 50.1% of the United Kingdom surrendering company is in a less favourable position than a United Kingdom resident company in a comparable situation would be as regards its capacity to act as the link between two United Kingdom companies liable to United Kingdom corporation tax. The fact that the disadvantage is further reflected in the value of the Luxembourg link company and is therefore felt by its owners, which are partially third country companies, and finally by the third country ultimate parent controlling the complex corporate structure, does not change this.
51.
There is therefore direct discrimination on the basis of the nationality of the link company. The United Kingdom provisions make it more advantageous for the link company’s parent to establish its subsidiary in the United Kingdom than anywhere else.
52.
As I have explained above, the United Kingdom Government has not put forward any grounds which could justify the restriction imposed by national legislation. Accordingly, I am unable to address that issue here.
53.
At this juncture it should also be ascertained whether the claimant companies are in fact entitled to invoke the freedom of establishment. It is apparent from the ruling in Philips Electronics UK (
28
) that companies can, for taxation purposes, invoke the restrictions of the freedom of establishment of another company which is linked to them in so far as such restrictions affect their own taxation. Hence the fact that neither the surrendering company nor the claimant companies have themselves exercised their freedom of establishment is irrelevant in this respect.
54.
Therefore the claimant companies may, for their own taxation purposes, invoke the limitation of freedom of establishment imposed on the link company to the extent that the United Kingdom rules, as interpreted by the national court, are inconsistent with Articles 43 EC and 48 EC.
55.
As an intermediate conclusion I submit that the requirement for United Kingdom residence or permanent establishment applicable to the link company in relation to a consortium claim for group relief constitutes an unjustified restriction of the freedom of establishment and is thus precluded by Articles 43 EC and 48 EC.
E – Third countries and freedom of establishment
56.
The relation of the freedom of establishment to third countries is important in the present case since the referring court asks with its second question whether the United Kingdom is required to provide a remedy to the claimant company, for example, by allowing that company to claim relief for the losses of the consortium company, in circumstances where the link company has exercised its freedom of establishment but the consortium company and the claimant companies have not exercised any of the freedoms protected by EU law, and the link(s) between the surrendering company and the claimant company consists of companies not all of which are established in the EU/EEA.
57.
This issue must, in my view, be analysed in the context of Question 1 because in essence it concerns the substantive content of the freedom of establishment, and not the remedies available in any procedural sense of the concept. (
29
) In other words, even if the Treaty precluded the requirement for the link company either to be a United Kingdom company or to have a permanent establishment there, would it still be permissible to require that the link company is an EU/EEA company or that the chain between the surrendering company and the claimant companies does not involve third country companies?
58.
Unlike the free movement of capital, freedom of establishment does not apply in relation to third countries. Does this mean that EU companies which are in fact controlled by third country companies or natural persons are excluded from freedom of establishment? In other words, is the freedom of establishment of the Luxembourg link company affected by the fact that it is controlled by a third country parent?
59.
It should be recalled here that Article 48 EC puts companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Union in the same position as nationals of the Member States so far as freedom of establishment is concerned. As the Court stated in ICI (
30
) it is the corporate seat in the sense of Article 48 EC that serves as the connecting factor with the legal system of a particular State, like nationality in the case of natural persons.
60.
There is nothing in the Treaties or the case-law of the Court to support the view that the freedom of establishment granted by EU law to the companies or firms referred to in Article 48 EC would be limited or affected by them being under the control of third country legal or natural persons. The status of being an EU company is based on the location of the corporate seat and the legal order where the company is incorporated, not on the nationality of its shareholders. If such EU companies were not covered by this freedom, many legal persons whose seat is in the European Union would be excluded from the freedom of establishment, and Member States could also otherwise, and not only by taxation, discriminate against them.
61.
The judgment in Halliburton Services (
31
) demonstrated that the EU law rights of Member State companies were not affected by the fact that their parent company, Halliburton Inc., was established in the United States of America. However, more far-reaching conclusions cannot be drawn from this judgment with regard to situations where EU companies without a common EU parent company belong to a non-EU company group. In Halliburton Services the national court had already confirmed that, under the bilateral treaty concerning taxation between the Netherlands and the United States of America, the Netherlands subsidiary that had bought the Netherlands permanent establishment of the German subsidiary could not be discriminated against because of the fact that the parent company of the group was constituted in the United States. (
32
)
62.
Therefore, in the present case, the link company, which is registered in Luxembourg, and its immediate parent company, which is also registered in Luxembourg, enjoy freedom of establishment, regardless of the fact that they are ultimately controlled by the parent company established in Hong Kong.
F – Permitted restrictions
63.
Does that mean that the United Kingdom cannot require there to be an unbroken chain within the EU/EEA between the surrendering company and the claimant companies? The Commission submits in its observations that the United Kingdom could impose such a requirement but that it did not do so for the period in issue in the main proceedings.
64.
To my mind that situation does not render this aspect of the referring court’s questions hypothetical or make the issue of third countries irrelevant in the sense that it should not be considered by the Court. In fact, in a situation where a national provision discriminates against ‘foreign’ legal or natural persons and is therefore inconsistent with EU law, it is not inconceivable that a national court could remedy that situation through an interpretation whereby such discrimination of EU/EEA nationals or companies is eliminated without the benefits of integration being extended to third country legal or natural persons. Whether this is legally possible is a matter of national law; EU law does not require that fundamental freedoms other than the free movement of capital be extended to third country subjects. (
33
)
65.
In Test Claimants in the Thin Cap Group Litigation (
34
) the Court excluded from the scope of application of freedom of establishment situations in which the parent controlling EU lending and borrowing companies was resident in a non-member country. The Court held that the treatment of interest paid by the borrowing company as a distribution affected freedom of establishment but only as regards the third country parent company enjoying a level of control over each of the other companies allowing it to influence the funding decisions of those companies. In such a situation Articles 43 EC and 48 EC were not applicable.
66.
As the freedom of establishment does not extend to third countries, EU law would not prevent the United Kingdom legislation from requiring that the link company be established in the EU/EEA. In other words, if, in the context of consortium relief, a surrendering company cannot surrender losses where the relevant link company is a third country company, the situation is outside the scope of Article 43 EC. For example, if in the main proceedings the link company, being both a member of the consortium and of the group, were incorporated in the British Virgin Islands instead of in Luxemburg, its freedom of establishment could not be invoked to support a claim for consortium relief. This would be the case even if the parent of the British Virgin Islands company were again an EU/EEA company.
67.
I have proposed above an interpretation according to which, on the one hand, freedom of establishment is infringed where the possibility of surrendering losses is precluded if the link company is an EU/EEA company but where, on the other hand, there is no infringement when the link company is a third country company. There I have approached the consortium relief scheme from the angle of the surrendering company and the disadvantage it may suffer, which, in terms of the freedom of establishment, affects its owners. It also is necessary to analyse the problem from the angle of the claimant companies.
68.
United Kingdom legislation requires that claimant companies belong to the same group as the link company, in other words the claimant company must be a 75% subsidiary of the link company or vice versa or both must be 75% subsidiaries of a third company. In the present case the link company and the claimant companies are 100% subsidiaries of Hutchison International Limited, a Hong Kong company which itself is a 100% subsidiary of the ultimate parent company of the group, Hutchison Whampoa Ltd. The chains from the link company and the claimant companies to their common parent pass through both EU/EEA and third country companies; they do not have a common EU/EEA parent company.
69.
In a system like the United Kingdom consortium relief scheme, national rules regulating the link that is required between the link company and the claimant company may affect the freedom of establishment of their lowest common parent, which enjoys the financial advantage created by the opportunity of setting off the losses of one company against the taxable profit of another company, thereby reducing the joint tax liability of the (sub)group under it. If that lowest common parent is an EU/EEA company, national rules regulating the link may create prohibited restrictions of the freedom of establishment. If that lowest common parent is a third country undertaking, the situation, following the logic in Test Claimants in the Thin Cap Group Litigation, falls outside the scope of the freedom of establishment.
70.
Furthermore, if the chain between the lowest common EU/EEA parent and the link company and/or the claimant companies passes through third countries, the situation will be outside the scope of Articles 43 EC and 48 EC. Freedom of establishment does not extend a right to create subsidiaries or branches in Member States to legal persons established in third countries. Just as the nationality of controlling shareholders is irrelevant for the existence of the freedom of establishment in the case of EU/EEA companies, so is it irrelevant for its non-existence in the case of third country companies.
G – Free movement of capital
71.
As I have explained above, it is possible that the relevant United Kingdom rules on consortium relief could or should be regarded as affecting free movement of capital, more particularly direct investments in the capital of the link company. To my mind this would not change the outcome of the analysis carried out above so far as intra-EU/EEA relations are concerned because the inability to surrender losses also creates a disadvantage for the shareholders of the link company irrespective of whether they have a controlling shareholding or a lesser shareholding.
72.
If the free movement of capital is affected, this will require extension of the scope of the United Kingdom consortium relief to third country companies. However, as the United Kingdom legislation also excluded third country link companies from the scope of consortium relief before 31 December 1993, the relevant provisions would not be caught by the prohibition of restrictions of the free movement of capital because of the stand-still clause in Article 57(1) EC (now Article 64 (1) TFEU). (
35
)
H – Proposed answers
73.
I therefore propose that the reply to the first question should be that in circumstances such as those of the case before the referring court, Articles 43 EC and 48 EC preclude a requirement that, for the purposes of a consortium relief scheme, the link company be either resident in the Member State concerned or carrying on a trade in that Member State through a permanent establishment situated there. However, those articles do not prohibit a Member State from requiring that the lowest common parent within the group of companies to which the link company and the companies receiving the losses for tax purposes belong be an EU/EEA company and that connections between the link company and the companies receiving the losses for tax purposes consist solely of EU/EEA companies. As to the second question, it is sufficient that it be answered in a similar manner to the fourth question in Philips Electronics UK.
IV – Conclusion
74.
In the light of the foregoing considerations, I propose that the Court should answer the questions raised by the First-Tier Tribunal (Tax Chamber) as follows:
(1)
In circumstances such as those of the case before the referring court, Articles 43 EC and 48 EC (now Articles 49 TFEU and 54 TFEU) preclude a requirement that, for the purposes of a consortium relief scheme, the link company be either resident in the Member State concerned or carrying on a trade in that Member State through a permanent establishment situated there. However, those articles do not prevent national legislation from requiring that the lowest common parent within the group of companies to which the link company and the companies receiving the losses for tax purposes belong be resident in one of the Member States or in a country belonging to the European Economic Area, and that the connections between the link company and the companies receiving the losses for tax purposes consist solely of such companies.
(2)
The national court must disapply any provision of the national legislation to the extent that it is contrary to Articles 43 EC and 48 EC.
(
1
)	Original language: English.
(
2
)	In the present context a group of companies refers to a set of parent and subsidiary companies functioning as an economic entity having a common source of control.
(
3
)	In general terms, a consortium can be characterised as an association of two or more companies having the objective of participating in a common activity or pooling their resources in order to achieve a common goal. However, under United Kingdom tax law the existence of a consortium depends on a certain defined ownership threshold being met, without any requirement for a common goal.
(
4
)	See Opinion of Advocate General Poiares Maduro in Case C-446/03 Marks & Spencer [2005] ECR I-10837, point 17.
(
5
)	Case C-264/96 ICI [1998] ECR I-4695; Marks & Spencer; and Case C‑18/11 Philips Electronics UK [2012] ECR.
(
6
)	In the present case a distinction needs to be made between the concepts of ‘lowest common parent (company)’ and ‘ultimate parent (company)’. The former can be characterised as follows: Company C is the lowest common parent company in relation to companies A and B if A and B are its direct or indirect subsidiaries and Company C does not have a subsidiary D which would be a parent company of both A and B. The ultimate parent company of a company group is a company which is the direct or indirect parent of all the group companies but not itself a subsidiary of any other company.
(
7
)	The claimant companies are: Felixstowe Dock and Railway Company Ltd, Savers Health and Beauty Ltd, Walton Container Terminal Ltd, WPCS (UK) Finance Ltd, AS Watson Card Services (UK) Ltd, Hutchison Whampoa (Europe) Ltd, Kruidvat UK Ltd and Superdrug Stores plc.
(
8
)	Relevant entities between Hutchison Whampoa Ltd and the claimant companies were various intermediate holding companies incorporated outside the EU/EEA (Hong Kong or the British Virgin Islands) and in the EU (the United Kingdom or the Netherlands).
(
9
)	A member of the Hutchison Whampoa group subsequently (23 June 2005) acquired the latter two companies, so that Hutchison 3G UK Holdings Ltd itself became a member of the group as defined by section 413(3)(a) ICTA.
(
10
)	Pursuant to section 413(3) ICTA.
(
11
)	Case C-371/10 [2011] ECR I-12273, paragraph 45.
(
12
)	Paragraph 23. Other cases where the question of the allocation of powers of taxation arose are, for example, Marks & Spencer, paragraph 45; Case C-414/06 Lidl Belgium [2008] ECR I-3601, paragraph 31; Case C-337/08 X Holding [2010] ECR I-1215, paragraph 28; and Case C‑123/11 A Oy [2013] ECR, paragraph 23.
(
13
)	The Netherlands Government, in contrast, takes the view that there is a restriction on the freedom of establishment which is justified.
(
14
)	See Opinion of Advocate General Kokott in Philips Electronics UK, point 22 and the case-law cited therein.
(
15
)	See Opinion of Advocate General Poiares Maduro Marks & Spencer, point 15.
(
16
)	See Opinion of Advocate General Kokott in Philips Electronics UK, points 14 and 29.
(
17
)	The nature of a cash-flow disadvantage felt at group level as a restriction of the freedom of establishment was emphasised by Advocate General Sharpston in her Opinion in Lidl Belgium, points 29 and 30.
(
18
)	This advantage at group level was recognised by the Court in Marks & Spencer, paragraph 32 (for citation see below).
(
19
)	Case C‑35/11 Test Claimants in the FII Group Litigation [2012] ECR, paragraphs 90 to 92.
(
20
)	Case C‑35/11 Test Claimants in the FII Group Litigation, paragraphs 93 and 94.
(
21
)	See sections 402(3), 406(1) and 413(6) ICTA.
(
22
)	This differs from Case C-157/05 Holböck [2007] ECR I-4051, in which there was collective control of a company by non-controlling shareholders.
(
23
)	It should be recalled here that investments conferring control are always direct investments, but that there are also investments that do not confer control but yet are not purely financial either, i.e. portfolio investments, because they seek to establish a stable relationship as regards the target company. In relation to direct investments under EU law, the Court has ruled that Article 63 TFEU on the free movement of capital covers, in principle, capital movements involving establishment or direct investment. The latter relates to a form of participation in an undertaking through the holding of shares which confers the possibility of effectively participating in its management and control (see Case C-182/08 Glaxo Wellcome [2009] ECR I-591, paragraph 40; Case C-81/09 Idrima Tipou [2010] ECR I-10161, paragraph 48; and Case C‑35/11 Test Claimants in the FII Group Litigation, paragraph 102). In OECD terminology, foreign direct investment refers to the objective of establishing a lasting interest. This implies the existence of a long-term relationship and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power is evidence of such relationship. See OECD Benchmark Definition of Foreign Direct Investment. Fourth Edition 2008, p. 48, point 117, and Model Tax Convention on Income and on Capital: Condensed Version 2010 (available in English at www.oecd.org). See also Smit, D., EU Freedoms, Non-EU Countries and Company Taxation, Kluwer Law International, 2012, pp. 64 and 68.
(
24
)	Philips Electronics UK, paragraphs 12 and 13.
(
25
)	Marks & Spencer, paragraph 32.
(
26
)	Case C-446/04 Test Claimants in the FII Group Litigation [2006] ECR I-11753, paragraph 84.
(
27
)	Joined Cases C-397/98 and C-410/98 Metallgesellschaft and Others [2001] ECR I-1727, paragraph 43.
(
28
)	Paragraph 39.
(
29
)	See Opinion of Advocate General Kokott in Philips Electronics UK, point 81.
(
30
)	Paragraph 20.
(
31
)	Case C-1/93 [1994] ECR I-1137.
(
32
)	See paragraph 6 of the judgment.
(
33
)	The situation here is different from the case of illegally granted state aid, which, according to the case-law, cannot be retroactively ‘legalised’: here we are dealing with the boundaries of a Member State’s obligation under EU law rather than the consequences of an infringement thereof. See Joined Cases C-261/01 and C-262/01 van Calster and Others [2003] ECR I-12249.
(
34
)	Case C-524/04 Test Claimants in the Thin Cap Group Litigation [2007] ECR I-2107, paragraphs 98 to 100.
(
35
)	It can be observed that section 402(3A) and (3B) ICTA, adopted in 2000, were preceded by a provision according to which ‘company’ meant only United Kingdom companies. See section 258(7) ICTA 1970 (cited in ICI, paragraph 6).