Marks & Spencer Plc v Halsey (Case C-446/03)
| Jurisdiction | England & Wales |
| Date | 2002 |
| Year | 2002 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr John F Avery Jones, Malcolm Gammie QC.
Graham Aaronson QC and Paul Farmer (instructed by KPMG) for the appellant.
Dr Richard Plender QC and David Ewart (instructed by the Solicitor of Inland Revenue) for the respondent.
1. This is an appeal by Marks and Spencer plc against the refusal of group relief claims for the years ended 31 March 1998, 1999, 2000 and 2001. The issue in the appeal is whether by virtue of European law the appellant is entitled to relief for losses incurred by subsidiaries established and resident in Belgium, France and Germany against the profits of the appellant parent company, which is resident in the UK.
2. We can state at the beginning that our decision is that the appellant is not so entitled. Furthermore, as we consider that the relevant principles established by the case law of the European Court of Justice are clear on the matter, we find it unnecessary to make a reference to the court for its guidance in reaching our decision.
3. The facts had been agreed between the parties as set out in the appendix and were not in issue before us. It is necessary to recite only a very few of them to understand the case. The appellant established subsidiaries, incorporated and resident for tax purposes in Belgium, France and Germany. The appellant did not own the subsidiaries directly. In the years under appeal they were held through a UK incorporated and tax resident subsidiary of the appellant, Marks and Spencer International Holdings Limited ("MSIH"), and through a Dutch incorporated and tax resident holding company, Marks and Spencer (Nederland) BV. The parties confirmed, however, that they regarded this chain of ownership as having no significance to our consideration of art. 43 EC.
4. The appellant and the Belgian, French and German subsidiaries carry on business as general retailers selling clothing, food, homeware and financial services from large stores in prime locations. The German subsidiary, Marks and Spencer (Deutschland) GmbH ("MSG"), ran four stores employing more than 160 people; the French subsidiary, Marks and Spencer (France) SA ("MSF"), ran 18 stores employing more than 1,200 people; and the Belgian subsidiary, SA Marks and Spencer (Belgium) NV ("MSB"), ran four stores employing more than 200 employees. We refer to MSG, MSF and MSB collectively as "the foreign subsidiaries".
5. The appellant exercised some control over such matters as location of stores and type of goods sold. The local activities of each of MSG, MSF and MSB were, however, managed and controlled by the directors of those companies in their respective jurisdictions. The foreign subsidiaries were not resident in the UK in the relevant years and traded only in their state of establishment. No part of the foreign subsidiaries' activities were conducted in the UK and the losses in issue accordingly arose from activities that were outside the scope of UK tax.
6. The trading performance of the foreign subsidiaries was variable but for various well publicised reasons, a trend developed towards rising losses in the second half of the 1990s. On 29 March 2001, the appellant announced its intention to divest itself of its Continental European activities. By 31 December 2001 MSF had been sold to a third party and trading operations had been discontinued in the remainder of its Continental European subsidiaries including MSG and MSB, which are now essentially dormant.
7. The trading losses suffered by the foreign subsidiaries in their final years (as computed under UK rules and agreed with the respondent) were as follows:
| Year ended 31 March 1998 | ||
| MSG | - | £4,360,327 |
| Year ended 31 March 1999 | ||
| MSG | - | £19,996,358 |
| MSF | - | £11,743,059 |
| Year ended 31 March 2000 | ||
| MSG | - | £12,924,763 |
| MSF | - | £15,272,142 |
| MSB | - | £1,942,188 |
| Year ended 31 March 2001 | ||
| MSG | - | £9,127,919 |
| MSF | - | £20,126,353 |
| MSB | - | £3,692,992 |
8. The appellant had sufficient other profits to absorb the foreign subsidiaries' losses in each of the years concerned and made group relief claims accordingly. The respondent refused to allow the appellant's claims for group relief for 1998, 1999 and 2000 on the basis that the foreign subsidiaries were not resident in the UK as required by s. 413(5) of the Income and Corporation Taxes Act 1988. That requirement was repealed by the Finance Act 2000 so that for accounting periods beginning on or after 1 April 2000, group relief was available in cases in which the loss making company is either resident in the UK or carrying on a trade in the UK through a branch or agency. The respondent accordingly refused the appellant's claim for group relief for 2001 on the basis that the foreign subsidiaries satisfied neither of those requirements.
9. Corporation tax is charged on the profits of companies that are either resident in the UK or conduct trading activities in the UK through a branch or agency (Income and Corporation Taxes Act1988, s. 6(1), 11(1) - references to statutory provisions are to the provisions of ICTA 1988, unless otherwise stated). A resident company, such as the appellant, is charged to corporation tax in respect of its worldwide profits (s. 8(1)). A non-resident company is charged to corporation tax only in respect of the profits attributable to its UK branch or agency (s. 11(1)). In the case of the foreign subsidiaries, the UK has entered into bilateral double taxation conventions with each of France, Belgium and Germany. Accordingly, the foreign subsidiaries as non-resident companies are only within the scope of UK corporation tax in respect of their trading activities if those activities are conducted in the UK through a permanent establishment within the treaty definition. As we noted in para. 5 above, none of the foreign subsidiaries was resident or maintained a permanent establishment in the UK or otherwise conducted its trading activities there. They were accordingly outside the scope of the UK corporation tax.
10. The appellant, however, as a UK resident company, is subject to corporation tax on its worldwide profits. Unlike many European countries, the UK adopts a tax credit system of relieving double taxation. It is not the UK's policy to exempt UK residents from tax (whether through domestic provision or by agreement under a treaty) in respect of their foreign profits. The principle that underlies this system is capital export neutrality, i.e. that the appellant's profits should be taxed in the same way whether it earns its profits in the UK or abroad. Thus, the appellant must bring its foreign profits into charge to UK tax. It is then entitled to credit any foreign tax suffered on those profits against its liability to UK tax on the same profits. (Alternatively, the foreign tax may be deducted in computing profits if that would be more beneficial, for example if as a result of UK losses there is no UK tax liability against which to credit the foreign tax.)
11. There are two aspects of this system that are relevant to our decision. First, if the appellant (or any of its UK subsidiaries) were to conduct trading activities in any of France, Belgium or Germany through a branch in those countries, the UK would tax the profits attributable to that establishment and credit any foreign tax against the UK tax on the branch profits (or allow the foreign tax to be deducted in calculating branch profits or losses for UK tax purposes). The branch trading profits would be calculated on UK tax principles. If a trading loss arose that loss could be set against the appellant's profits. Any unrelieved loss would be carried forward. The fact that the loss may also be relieved in the foreign jurisdiction against the branch's future profits does not affect the relief against UK profits.
12. Second, if the appellant chooses (as it did) to establish in France, Belgium and Germany through foreign (non-resident) rather than UK subsidiaries, any dividends paid to the appellant (or in this case MSIH) by those foreign subsidiaries are taken into account as part of its profits in the year of receipt. With a foreign subsidiary (instead of a branch), a UK resident parent company is not taxed on the profits of the foreign subsidiary as they arise, nor is relief given for any losses. The only exception to that rule is where the UK's controlled foreign company legislation applies, in which case the income of the foreign subsidiary is attributed to the UK parent and taxed with relief for foreign tax paid by the subsidiary. Consistently with the treatment of foreign income generally, if and when the foreign subsidiary pays a dividend to its UK parent that dividend is taxed but credit is given for the foreign tax both on the profits out of which the dividend is paid and any withholding tax (although the Parent-Subsidiary Directive (Council Directive 90/435 of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different members states) now prevents any such withholding tax being levied on dividends from subsidiaries established in the member states).
13. In summary, where a company such as the appellant establishes itself abroad through a subsidiary as compared with a foreign branch, worldwide income is taxed with relief for foreign tax but with the difference that for a subsidiary such taxation is charged only as, when, and to the extent to which, dividends are paid to the UK. There is no specific relief for losses of foreign subsidiaries, although these may have the indirect effect of reducing the amount of dividends paid and therefore taxed in the hands of the parent company. For the years in...
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