Case Notes
| Published date | 01 June 2015 |
| Date | 01 June 2015 |
| DOI | 10.1177/1023263X1502200306 |
| Subject Matter | Case Notes |
22 MJ 3 (2015) 417
CASE NOTES
CROSSBORDER COMPENSATION OF
‘FINAL LOSSES’ FOR TAX PURPOSES
THE DRAMA CONTINUES …
Case C-172/13European Commission v. United Kingdom, EU:C:2015:50
A C*
§1. IN T RODUC T ION
e tax treatment of losses has been gaini ng more and more importance th rough the
case law of the Court of Just ice of the European Union (CJEU) over the years. From the
taxpayers’ perspect ive, the possibility of sett ing o a loss f rom one activity against pro ts
from another activ ity may in fact be the only positive aspect about the loss: this may at
least trigger a cash- ow advantage and, dependi ng on the circumstances, even lead to an
overall reduction of the ta x burden. However, Member States maintain a large number
of domestic rules that o en limit or even exclude such loss compensation, part icularly
when it comes to cross-border activies. It is therefore not very astonishing that various
cases concerning t he compatibility of domestic res trictions on loss utilization with t he
EU fundamental f reedoms have reached national courts a nd, ultimately, the CJEU.
While every once in a while these case s deal with losses su ered by individuals from
their economic activites a nd investments, a large par t of the litigation on the national
and European level concerns enterpr ises and losses su ered by their subsidiaries or
permanent establish ments (see Section 3).
In the context of enterprise ta xation, in 2005 the Gra nd Chamber of the CJEU had
given a landmark ru ling on cross-border loss compensation in t he famous Marks &
Spencer case.1 For almost a decade now the principles developed by the CJEU in th is
judgment have not only given food for thought in academic circles, 2 but have also
* Professor of tax law, Kat holieke Universiteit Leuven, a nd Of Counsel, Flick G ocke Schaumburg, Bon n.
2 From the innumerable pu blications see, e.g., A. Cordewener and I. D örr, ‘Annotation’, 43 CML Rev.
(2006), p.855–88 4; M. Lang, ‘ e Mark & Spence r Case – e Open Is sues Following the ECJ‘s Fina l
Word ’, 46 European Taxation (2006), p.5 4–67; M. Lang, ‘D irect Taxation: Is t he ECJ Heading in a
New Direction?’, 46European Taxation (2006), p.421–430; M.P. Scheunema nn, ‘Decision in the Ma rks
Axel Cordewener
418 22 MJ 3 (2015)
created a considerable amount of confusion in practice for ta xpayers and national
tax authorities, cou rts, and legislators. In recent years the so-cal led Marks & Spencer
doctrine (for details se e Section 2) has even been increasing ly criticized by severa l
Advocates General at the CJEU. In in fringement proceedings initiated by the Europea n
Commission against the amendments made by the UK to its domest ic legislation a er
Marks & Spencer, the CJEU had the opportu nity to go back to the roots and rev ise its
case law. However, in a judgment rendered on 3February 2015, the Grand Chamber of
the CJEU shied away from any debate on principles, st uck to its doctrine and merely
attempted to clarif y certain details.
§2. THE CJEU’S CASE LAW ON LOSSES: A ROUGH OVERVIEW
In the CJEU’s case law on the application of t he EU fundamental f reedoms (above all,
the freedom of establish ment under Articles 49 and 54 TFEU) to loss-related issues,
di erent categories of situations can be disting uished. First of al l, there is a number
of cases which involved a certa in cross-border element (for example, a local branch
with a foreign head o ce, a foreign intermediate holding company existing wit hin a
group structure, a nd so on), but did not raise the problem of a real cross-border loss
compensation. is g roup of cases focuses on the compensation of domestic losses w ith
domestic pro ts within one and the same Member State , and the CJEU has made it clear
that less favourable treatment in such cases compared to purely domest ic cases wit hout
any cross-border element amounts to discrimination.3 Against t he background of the
CJEU´s understanding of the ‘ scal princ iple of territori ality ’,4 this seems acceptable,
in particu lar as the obligation of the Member State concerned will ha rdly be capable of
endangering, or even underm ining, the ‘al location of powers of taxation between t he
Member States’ or the ‘symmet ry between the right to tax pro ts and the r ight to deduct
losses’ (see Section 3), respectively.5
& Spencer Case: a Ste p Forward, but No Victor y for Cross-Border Group Taxat ion in Europe’, 34
Intertax (2006), p.54 –57; T. Rønfeldt, ‘Mark s & Spencer: Community L aw Extends a Helping Hand’,
17European Business Law Review (2006), p. 1715–1726. Most recently, see D. Pezze lla, ‘Final Losses
under EU Tax Law: Proposa l for a Better Approach’, 54European Taxation (2014), p.71–79; M. Lang,
‘Has the Case L aw of the ECJ on Fina l Losses Reached the End of the Li ne?’, 55European Taxation
(2014), p.530–540; Y. Brauner, A.P. Dourado a nd E. Traversa, ‘Ten Years of Marks & Spenc er’, 43
Intertax (2015), p.306–314.
3 See Case C-250/95 Futura Partic ipations SA, EU:C:1997:239; Case C-264/96 ICI plc, EU:C:1998:370; Case
C-200/98 X AB, Y AB, EU:C:1999:566; Case C-141/99 AMID NV, EU:C:2000 :696; Case C -431/01 Mertens,
Ltd, EU:C:2012:532; Case C- 80/12 Felixtowe Dock an d Railway Company Ltd et al ., EU:C:2014:200;
4 See Case C-250/95 Futura Partic ipations SA, para. 21 et seq.; Ca se C-345/04 Centro Equestre da Lezíria
Grande Lda, EU:C:2007:96, par a. 22.
5 See Case C-18/11 Philips Electron ics UK Ltd, para. 23 et s eq.; Case C-80/12 Felix towe Dock and Railway
Company Ltd et al, pa ra. 30. is reasoning a lso applies to C-182/06 Lakebrink, EU:C:2007:452, where
Cross-Border Compen sation of ‘Final Losse s’ for Tax Purposes – e Drama Cont inues …
22 MJ 3 (2015) 419
e second main category of situations concerns the actual cross-border compensation
of for eign lo sses w ith d omesti c pro ts. i s is th e ques tion of wheth er EU Mem ber Sta tes
that allow purely domest ic losses to be o set must – aga in on the basis of the principle of
non-discriminat ion enshrined in the fundamenta l freedoms – open up their tax systems
to (foreign) losses incurred outside their territory. In this resp ect, the CJEU, start ing
with Marks & Spencer, has developed a speci c line of case law. is indeed obliges the
Member State of residence of a taxpayer to accept that, under certain cond itions, losses
su ered by subsidiaries or permanent establish ments (PEs) set up in other Member
States must be taken into consideration in t he hands of that resident taxpayer (parent
corporation or he ad o ce), with a view to being o set against taxable pro ts in the
former Member State. e essential cond ition triggering th is obligation of the Member
State of residence is t hat the loss must be ‘ na l’, in the sense that any uti lization for tax
purposes in the Member State of the subsidiary or PE must be excluded (see Section 3).
It is in this speci c context that the present judgment of the Grand Cha mber in Case
C-172/13 must be placed (see Section 4).
For the sake of completeness, it should be noted that some decisions of the CJ EU
on loss compensation do not exactly t in t he two above-mentioned categories, which
may be due to the fact that they concerned r ather extraordina ry situations. One such
situation is that of currency losses su ered by enterprises engaged in cross-border
activities.6 Another ty pe of situation is that of non-resident private individuals who had
su ered los ses (related to the use of their family home) in their Member State of (actual)
residence. ey were, due to a legal ction under the domes tic tax law of the Member
State where they exercised an economic ac tivity (in the public ser vice), also considered
to be tax residents of the lat ter Member State.7 e partic ularities of the aforementioned
cases cannot be add ressed in the present case note.
§3. THE MARKS & SPENCER DOCTRINE ON ‘FINAL’ LOSSES:
ITS DEVELOPMENT AND PRACTICAL APPLICATION
In a nutshell, Marks & Spencer dealt with the quest ion whether the UK system on loss
compensation within a group of companies (‘group relief’) could remai n limited to
non-resident individuals sought to have losses su ered in their Member St ate of residence taken into
account in anot her Member State (where they exerci sed an employment activity) not on the level of
the tax bas e but, under the (negative) ‘progressiv ity proviso’, on the level of the ta x rate applied to their
employment income in the Me mber State of source.
6 See Case C-293/06 Deutsche Shell, EU:C:200 8:129; and most recently Case C- 686/13 X, EU:C:2015:375.
7 See Case C-152/03 Ritter-Coulais, EU:C:2006:123, with an explan ation of the relevant G erman legis lation by
A. Cordewener, ‘Foreign Los ses, Tax Treaties and EC Funda mental Freedoms: A New G erman Case Before
the ECJ’, 43European Taxation (2003), p.294–303, 295 et seq.; C ase C-527/06 Renneberg, EU:C:2008:566,
with a very critical analysis by E.C.C.M. Kemmeren, ‘Renneberg End angers the Double Tax Convention
System Or Can a Se cond Round Bring Recovery ’, 18 EC Tax Review (2009), p.4–15, 9 et seq.
To continue reading
Request your trial