European Commission v United Kingdom of Great Britain and Northern Ireland.
Date: 2015-02-03
22. Group relief under the CTA 2010 constitutes a tax advantage for the companies concerned. By speeding up the relief of the losses of loss-making companies by allowing them to be set off immediately against the profits of other group companies, that system confers a cash-flow advantage on the group (see judgments in Marks & Spencer  EU:C:2005:763, paragraph 32, and Felixstowe Dock and Railway Company and Others , C‑80/12, EU:C:2014:200, paragraph 19).
23. The difference in treatment, found in paragraph 21 above in relation to the granting of the tax advantage in question, between losses sustained by resident subsidiaries and those of non-resident subsidiaries is of such a kind as to hinder the exercise by the group parent company of its freedom of establishment for the purposes of Article 49 TFEU by deterring it from setting up subsidiaries in other Member States (see, to that effect, judgments in Marks & Spencer , EU:C:2005:763, paragraph 33; Felixstowe Dock and Railway Company and Others , EU:C:2014:200, paragraph 21; and Nordea Bank Danmark , C‑48/13, EU:C:2014:2087, paragraph 22).
24. However, according to the case-law of the Court, such a difference in treatment may be justified by three overriding reasons in the public interest, taken together, that is to say, by the need to preserve the balanced allocation of powers of taxation between the Member States, the need to prevent the double use of losses and the need to combat tax avoidance (see, to that effect, judgments in Marks & Spencer , EU:C:2005:763, paragraph 51; Oy AA , C‑231/05, EU:C:2007:439, paragraph 51; and A , C‑123/11, EU:C:2013:84, paragraph 46).
26. In that regard, it should be borne in mind that, in paragraph 55 of the judgment in Marks & Spencer  (EU:C:2005:763), which concerned the ICTA, under which the possibility of losses sustained by non-resident subsidiaries being taken into account for the purposes of group relief was wholly precluded, the Court held that the difference in treatment between the losses sustained by a resident subsidiary and those sustained by a non-resident subsidiary goes beyond what is necessary to attain the objectives pursued in a situation where, first, the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods, if necessary by transferring those losses to a third party or by offsetting the losses against the profits made by the subsidiary in previous periods, and, secondly, there is no possibility for the foreign subsidiary’s losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party (see also judgments in Lidl Belgium , C‑414/06, EU:C:2008:278, paragraph 47, and A , EU:C:2013:84, paragraph 49).
27. According to paragraph 56 of the judgment in Marks & Spencer  (EU:C:2005:763), where, in one Member State, the resident parent company demonstrates to the tax authorities that a non-resident subsidiary has sustained definitive losses, as described in paragraph 55 of that judgment, it is contrary to Articles 49 TFEU to preclude the possibility for the parent company to deduct from its taxable profits in that Member State the losses incurred by its non-resident subsidiary.
33. It should be noted, however, that the first of those situations referred to by the Commission is irrelevant for the purposes of assessing the proportionality of Section 119(4) of the CTA 2010. It is settled law that losses sustained by a non-resident subsidiary cannot be characterised as definitive, as described in paragraph 55 of the judgment in Marks & Spencer  (EU:C:2005:763), by dint of the fact that the Member State in which the subsidiary is resident precludes all possibility of losses being carried forward (see judgment in K , EU:C:2013:716, paragraphs 75 to 79 and the case-law cited). In such a situation, the Member State in which the parent company is resident may not allow cross-border group relief without thereby infringing Article 49 TFEU.
36. Secondly, it should be borne in mind that losses sustained by a non-resident subsidiary may be characterised as definitive, as described in paragraph 55 of the judgment in Marks & Spencer  (EU:C:2005:763), only if that subsidiary no longer has any income in its Member State of residence. So long as that subsidiary continues to be in receipt of even minimal income, there is a possibility that the losses sustained may yet be offset by future profits made in the Member State in which it is resident (see judgment in A , EU:C:2013:84, paragraphs 53 and 54).
37. Referring to a specific example of a resident parent company which obtained cross-border group relief, the United Kingdom confirmed that it is possible to show that losses sustained by a non-resident subsidiary may be characterised as definitive, as described in paragraph 55 of the judgment in Marks & Spencer  (EU:C:2005:763), where, immediately after the end of the accounting period in which the losses have been sustained, that subsidiary ceased trading and sold or disposed of all its income producing assets.
39. With regard to the assertion that Section 119(4) of the CTA 2010 entails an infringement of Article 31 of the EEA Agreement, another contention raised by the Commission, it should be noted that, in so far as the provisions of Article 31 of the EEA Agreement have the same legal scope as those of Article 49 TFEU, which are substantively identical, all the foregoing considerations may, in circumstances such as those of the present case, be transposed mutatis mutandis  to Article 31 of the EEA Agreement (see, to that effect, judgment in Commission  v Finland , C‑342/10, EU:C:2012:688, paragraph 53 and the case-law cited).