• Service: Tax, International Tax
  • Type: Regulatory update
  • Date: 4/2/2014

United Kingdom - Loss transfer restrictions incompatible with EU law 

April 2:  The Court of Justice of the European Union (CJEU) issued a judgment finding that UK tax law provisions requiring that a “link company” must be established in the UK for companies to be entitled to consortium group relief infringes on the freedom of establishment. Felixstowe Dock and Railway Co. Ltd. v. HM Revenue & Customs, C-80/12 (1 April 2014).

According to the CJEU release [PDF 109 KB], the CJEU found that because the ultimate parent company of the group and of the consortium (as well as a number of intermediate companies) had been established in third countries has no effect on the application of freedom of establishment.

UK tax law

In the UK, losses of a company may be deducted from the taxable profits of another company when those companies are members of the same group of companies. In certain instances:

  • Losses also may be transferred between a company that is a member of a consortium (i.e., a temporary collaboration of several companies in a project or program) and another company that is owned, directly or indirectly, by the consortium.
  • Losses may be transferred between a company that is a member of a group and a company owned by a consortium when they are connected by a third company (the “link company”) that is a member of both the group and the consortium.


The companies involved in this case include:

  • A Hong Kong company—the parent company of an international group of companies
  • A UK company operating in the telecommunications sector, and owned by a consortium
  • A Luxembourg company that is part of the consortium and also a member of the group of companies—and therefore a “link company” under UK tax law

The UK company sustained losses following substantial investments made for the purpose of the establishment and operation of a mobile telephone network. UK companies that were members of the group sought to set those losses against their profits. However, the UK tax authorities rejected these claims on the basis that the link company involved in the transfer of losses was neither a resident in the United Kingdom for tax purposes nor had a permanent establishment in the UK.

The First-tier Tribunal (Tax Chamber) (UK) referred the taxpayer’s challenge to the CEJU for a judgment as to whether the UK tax law restrictions on the transfer of losses is compatible with the freedom of establishment.

CJEU judgment

In its judgment, the CJEU found that the residence condition applicable to the link company introduces a difference in treatment between resident companies connected by a UK link company, which are entitled to the tax benefit, and resident companies connected by a link company established in another EU Member State of the EU, which are not entitled to the tax benefit.

That difference, according to the CJEU, makes it less attractive in tax terms to set up a link company in another EU Member State, and thus constitutes a restriction on freedom of establishment.

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