A UK company’s parent company was established in the Netherlands. The Netherlands parent company, in turn, indirectly owned a Dutch company which had a loss-making permanent establishment in the UK.
The UK company requested that the UK tax authorities allow the losses of the UK permanent establishment to be set off against the UK company’s profits. This claim was rejected on the basis that under UK tax law, losses incurred by a UK permanent establishment of a non-resident company can only be set off against the profits of a UK company belonging to the same group or consortium, provided that the losses cannot be used against non-UK profits.
In this case, the UK permanent establishment’s losses could be set off against the Dutch company’s profits. Under UK tax law, the UK company would be entitled to claim relief if the UK permanent establishment had been a UK resident company—and not the UK branch of a non-resident company.
The CJEU Advocate General delivered an opinion in favor of the taxpayer company in April 2012. See TaxNewsFlash-Europe: United Kingdom - ECJ Advocate General’s opinion concerning losses of UK branch of non-resident company
This week, the CJEU followed suit by deciding that the UK provision is a restriction on the freedom of establishment (under the EU Treaty), and that it cannot be justified by overriding reasons in the public interest.
The CJEU clarified that its conclusion was not affected by the fact that the taxpayer company had not itself suffered a restriction of its freedom of establishment.
Tax professionals will view this clarification as particularly significant because of its potential application to other situations. In particular, HMRC has to date resisted claims with respect to group relief for losses arising in EU Member States in instances when the parent company is resident in an EU Member State other than the UK—but this position now appears to be untenable.
Read a September 2012 report [PDF 52 KB] prepared by KPMG’s EU Tax Centre: CJEU decision in the Philips Electronics case