ECJ Grand Chamber: Marks & Spencer (C-446/03) (by Sjoerd Douma)

Sjoerd Douma, a colleague here in Leiden (Department of Tax Law, also of PWC's EU Direct Tax Group), wrote this guest post on the ECJ's decision in the case of Marks & Spencer v. Halsey, of last tuesday; many thanks for that. The decision itself can be found here.

Last Tuesday the ECJ (Grand Chamber) handed down its judgment in the case of Marks & Spencer, some eight months after Maduro’s much-discussed Opinion. The judgment was anxiously awaited by governments as well as companies, lawyers and academics. Will companies be able to benefit from loss relief in cross-border situations? Major consequences for Member States’ national budgets? Will there be a limitation of the effects of the judgment for budgetary reasons? Will the ECJ depart from its decision in Futura Participations and Singer (C-250/95)? The answers in short: no temporal limitation, at first sight no major impact on national budgets, cross-border loss-relief: yes and no, judgment aguably not consistent with Futura.

M&S, a company registered in England and Wales, in 2001 ceased trading in Continental Europe owing to the losses recorded from the mid-1990s. Subsequently, M&S claimed ‘group relief’ for losses incurred by its Belgian, German and French subsidiaries. This claim was refused by the UK tax authorities: UK resident companies in a group may not set off their profits and losses among themselves where the losses are incurred by subsidiaries which have no establishment in the United Kingdom and do not trade there.

Firstly, the ECJ held that the United Kingdom provisions constitute a restriction on freedom of establishment. The ECJ confirmed that the UK tax system was in accordance with the principle of territoriality enshrined in international tax law and recognised by Community law (see Futura). Nevertheless, it ruled that this does not in itself justify restricting group relief to losses incurred by resident companies. Accordingly, the ECJ dismissed the UK’s argument that non-UK resident and UK resident subsidiaries were not in comparable tax situations. Regarding justification, the ECJ accepted that the preservation of allocation of taxing powers between Member States, the prevention of double relief and the risk of tax avoidance where a multinational seeks to offset losses against the highest tax rate profits, taken together allow a Member State generally to deny cross-border loss relief. However, where there is no local loss relief whatsoever, whether by carryback, current relief or carryforward, an unconditional UK denial of cross-border loss relief is disproportionate.

The judgment raises many questions, such as:

· How can the M&S judgment be reconciled with the judgment in Futura where the ECJ held that “a system, which is in conformity with the fiscal principle of territoriality, cannot be regarded as entailing any discrimination, overt or covert, prohibited by the Treaty”?
· Has the ECJ changed its practice of striking down in its entirety a Member State tax provision where the application of that rule would be disproportionate?
· Why did the ECJ not expressly deal with the preliminary question on the disadvantage connected to the choice of the legal form of the foreign establishment (a disadvantage flowing from the fact that M&S chose to locate establishments in the other Member States in the form of subsidiaries rather than in the form of branches)?
· How to deal with taxpayers suffering only a timing disadvantage regarding utilisation of EU foreign subsidiaries’ losses? Might they nonetheless have a claim?
· How should we apply the test regarding the local possibilities of loss relief? Should we apply the test in the year in which the loss has arisen, or should we apply this test retrospectively when it is clear whether a local loss relief has de facto been granted? If we should apply retroactively, how should we deal with tax assesments – regarding the loss-year – which are final and not open to appeal? Or should the loss be taken into acount in another taxable year? And how does all this relate to the procedural autonomy of the Member States?

These questions will undoubtedly trigger new preliminary proceedings. It seems inevitable that positive harmonisation is needed. It is expected that the European Commission will reissue a paper on cross-border loss relief next year. Taken into account Europe’s history of direct tax harmonisation, taxpayers’ expectations should not be all too high…