Case Notes
| DOI | 10.1177/1023263X1502200306 |
| Published date | 01 June 2015 |
| Date | 01 June 2015 |
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. INTRODUCTION
e tax treatment of losses has been gaining more and more importance through 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 activity 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 tax burden. However, Member States maintain a large number
of domestic rules that o en limit or even exclude such loss compensation, particularly
when it comes to cross-border activies. It is therefore not very astonishing that various
cases concerning the compatibility of domestic restrictions on loss utilization with the
EU fundamental freedoms have reached national courts and, ultimately, the CJEU.
While every once in a while these cases deal with losses su ered by individuals from
their economic activites and investments, a large part of the litigation on the national
and European level concerns enterprises and losses suered by their subsidiaries or
permanent establish ments (see Section 3).
In the context of enterprise taxation, in 2005 the Grand Chamber of the CJEU had
given a landmark ruling on cross-border loss compensation in the famous Marks &
Spencer case.1 For almost a decade now the principles developed by the CJEU in this
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.
1 Case C-446/03 Marks & Spencer plc, EU:C:2 005:763.
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.54–67; M. Lang, ‘Direct Taxation: Is the 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 taxpayers and national
tax authorities, courts, and legislators. In recent years the so-called Marks & Spencer
doctrine (for details see Section 2) has even been increasingly criticized by several
Advocates General at the CJEU. In in fringement proceedings initiated by the Europea n
Commission against the amendments made by the UK to its domestic legislation a er
Marks & Spencer, the CJEU had the opportunity to go back to the roots and revise its
case law. However, in a judgment rendered on 3February 2015, the Grand Chamber of
the CJEU shied away from any debate on principles, stuck 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 the EU fundamental freedoms (above all,
the freedom of establishment under Articles49 and 54 TFEU) to loss-related issues,
di erent categories of situations can be distinguished. First of all, there is a number
of cases which involved a certain cross-border element (for example, a local branch
with a foreign head o ce, a foreign intermediate holding company existing within a
group structure, and 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 the background of the
CJEU´s understanding of the ‘ scal principle of territoriality’,4 this seems acceptable,
in particu lar as the obligation of the Member State concerned will ha rdly be capable of
endangering, or even undermining, the ‘allocation of powers of taxation between the
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 Step Forward, but No Victory for Cross-Border Group Taxation 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 and E. Traversa, ‘Ten Years of Marks & Spencer’, 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,
EU:C:2002:492; Case C-418/07 Société Papillon, EU:C:2008:859; Case C -18/11 Philips Electronics U K
Ltd, EU:C:2012:532; Case C-80/12 Felixtowe Dock and Railway Company Ltd et al., EU:C:2014:200;
Joined Cases C-39/13, C-4 0/13 and C-41/13 SCA Group Holding BV et al., EU:C:2 014:1758.
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 respect, the CJEU, starting
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 establishments (PEs) set up in other Member
States must be taken into consideration in the hands of that resident taxpayer (parent
corporation or head oce), with a view to being o set against taxable pro ts in the
former Member State. e essential condition triggering this obligation of the Member
State of residence is t hat the loss must be ‘ nal’, 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 Chamber 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 CJEU
on loss compensation do not exactly t in the two above-mentioned categories, which
may be due to the fact that they concerned rather extraordinary situations. One such
situation is that of currency losses suered 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 domestic tax law of the Member
State where they exercised an economic activity (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 question whether the UK system on loss
compensation within a group of companies (‘group relief’) could remain limited to
non-resident individuals sought to have losses su ered in their Member St ate of residence taken into
account in another 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.
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