Arsene Taxand - Corporate Tax management ans strategy

Marks & Spencer case (C-446/03)

In its Marks & Spencer decision, the Court of Luxembourg laid the first stone in the building of European tax consolidation. The European Court of Justice decided in the way that the European Commission wanted since the European Commission has been meeting with systematic refusal by States which do not want to give up one of the last areas in which they are able to make a completely independent assessment.

Against this background, the line of reasoning followed by the European Court of Justice is full of finesse and subtlety and leads to a decision with a very limited practical scope of application, which should satisfy Member States. In fact, these Member States expected the decision to be much more unfavorable to them.

First of all, the European Court of Justice holds that refusal of the possibility for a UK parent company to offset against its income the losses incurred by a subsidiary that is resident in another European Union Member State whereas it can offset against its income the losses incurred by a subsidiary that is resident in the United Kingdom is contrary to the principle of freedom of establishment in this other Member State (discrimination against foreign goods or services or "discrimination à rebours").

The European Court of Justice then reiterates the principle whereby a restriction on freedom of establishment is permissible only if it pursues a legitimate objective compatible with the EU Treaty and is justified by imperative reasons in the public interest and on condition that this restriction does not go beyond what is necessary to attain this objective.

In the case in point, the Court holds that the UK regulations at issue pursue objectives that are compatible with the Treaty and are based on imperative reasons in the public interest (the impossibility to offset losses generated by a non-resident subsidiary is only the result of the principle of balanced allocation of the power to impose taxes between Member States, existence of a risk of double use of losses and existence of the risk of tax avoidance); however, the ECJ considers that the restrictive measure at issue goes beyond what is necessary to attain the objectives pursued where:
- the non-resident subsidiary cannot use these losses in respect of the accounting period concerned by the claim for relief involving such losses being taken into account by the parent company resident in the UK and
- there is no possibility to carry forward these losses to future tax periods, either for the subsidiary itself or for a third party in the event of sale of the subsidiary to such third party.

It is only in the second situation that the European Court of Justices considers that UK legislation is in contradiction with the principle of freedom of establishment.

The scope of application of this decision is therefore important from a theoretical standpoint as it lays the first stone for the creation of a tax consolidation system at European level, although it is limited in practice inasmuch as the situation covered is rarely encountered.

It is reasonable to consider that this decision could potentially be transposed to France, even though the UK system of "Group relief" is fundamentally different from the French tax consolidation regime.

That being said, it should be noted that the possibility has already existed for a long time for French companies to deduct the losses generated by their non-resident subsidiaries through the mechanism of subsidies and debt waivers (the field of application of this mechanism is even much broader than that resulting from the Marks & Spencer decision).

Roland Schneider