European Commission v United Kingdom of Great Britain and Northern Ireland.

• Jurisdiction: European Union
• Celex Number: 62013CC0172
• ECLI: ECLI:EU:C:2014:2321
• Date: 23 October 2014
• Docket Number: C-172/13
• Court: Court of Justice (European Union)
• Procedure Type: Recours en constatation de manquement - non fondé

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 23 October 2014 ( 1 )

Case C‑172/13

European Commission

v

United Kingdom of Great Britain and Northern Ireland,

supported by

Federal Republic of Germany

Kingdom of Spain

Kingdom of the Netherlands

Republic of Finland

‛Tax law — Freedom of establishment — Article 49 TFEU and Article 31 of the EEA Agreement — National corporation tax — Group taxation — Group relief — Loss relief for foreign group members — ‘Marks & Spencer exception’ — Time at which it is determined that there is no possibility for losses to be taken into account elsewhere in the future’

I – Introduction

1. The present Treaty-infringement proceedings concern, once again, the interpretation of the judgment in Marks & Spencer. ( 2 ) In that judgment, using the example of United Kingdom law, the Court set out the conditions under which the Member States’ laws governing taxes on income must also permit cross-border group relief, the so-called ‘Marks & Spencer exception’.

2. Those conditions, unfortunately, are anything but clear. This has been shown not only by the cases in which the Court has had to deal with their application in specific circumstances. ( 3 ) In addition, both Advocate General Geelhoed and Advocate General Mengozzi have stated that they consider the scope and the purpose of the Marks & Spencer exception to be unclear. ( 4 ) That view is shared not only by me ( 5 ) but also by many legal authors, who advocate a very wide range of interpretations of the Marks & Spencer exception. ( 6 )

3. It is not surprising, therefore, that the European Commission and the United Kingdom of Great Britain and Northern Ireland also do not agree on the correct implementation of the judgment in Marks & Spencer, even though that judgment now dates back almost nine years.

II – Legislative framework

4. The United Kingdom levies a tax on the incomes of legal persons. Within groups of the European Economic Area there is the possibility to transfer a loss incurred by a group member in an accounting period to another group member so that the latter can offset the third-party loss against its own income (‘group relief’).

5. If, however, the loss is incurred by a group member established in another Member State of the European Union or in an EFTA State belonging to the European Economic Area, group relief is subject to special conditions which are laid down, for the relevant period, in section 111 et seq. of the Corporation Tax Act 2010 (CTA 2010). Those conditions include, under section 119(2) of CTA 2010, the condition that neither the foreign group member nor any other taxpayer has the possibility of offsetting such a loss against any future income within the framework of its foreign taxation in accounting periods after the tax year in which the loss was suffered. The existence of that possibility must be determined, under section 119(4) of CTA 2010, as at the time immediately after the end of the tax year in which the loss was suffered.

III – Background to the dispute and procedure before the Court

6. The United Kingdom had introduced group relief in regard to foreign group members — initially by amending the Income and Corporation Taxes Act 1988 with effect from 1 April 2006 — in order to comply with the conditions relating to the freedom of establishment laid down by European Union law. These had been inferred by the United Kingdom from the judgment in Marks & Spencer, which was delivered on 13 December 2005. In that judgment the Court ruled: ( 7 ) ‘As Community law now stands, Articles 43 EC and 48 EC do not preclude provisions of a Member State which generally prevent a resident parent company from deducting from its taxable profits losses incurred in another Member State by a subsidiary established in that Member State although they allow it to deduct losses incurred by a resident subsidiary. However, it is contrary to Articles 43 EC and 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.’

7. The Commission had doubts as to the compatibility of the new United Kingdom rules with the judgment in Marks & Spencer and, by letter of 19 July 2007, gave the United Kingdom an opportunity to comment in this regard. In its reasoned opinion of 23 September 2008, it alleged that the United Kingdom had acted contrary to the freedom of establishment. In particular, the breach resided in the fact that the possibility of obtaining future relief elsewhere had to be assessed at the end of each accounting period and the new rules were not applicable before 1 April 2006. On 25 November 2010 a supplementary reasoned opinion was sent in the light of the recently enacted CTA 2010, which essentially reproduced the previously contested provisions of the Income and Corporation Taxes Act 1988 without modification.

8. After the United Kingdom had failed to comply with the Commission’s request to amend its legislation within the prescribed period of two months, on 5 April 2013 the Commission brought an action before the Court, pursuant to the second paragraph of Article 258 TFEU, in which it claims that the Court should: — declare that, by imposing conditions on cross-border group relief that make it virtually impossible in practice to obtain such relief and by restricting such relief to periods after 1 April 2006, the United Kingdom has failed to comply with its obligations under Article 49 TFEU and Article 31 of the EEA Agreement; and — order the United Kingdom to pay the costs.

9. The United Kingdom contends that the Court should: — dismiss the Commission’s application; and — order the Commission to pay the costs.

10. The Federal Republic of Germany, the Kingdom of Spain, the Kingdom of the Netherlands and the Republic of Finland were granted leave to intervene. They are supporting the form of order sought by the defendant.

11. The parties and the interveners first submitted written observations and also presented oral argument on 15 July 2014.

IV – Assessment

12. The Commission alleges that the United Kingdom has acted contrary to the freedom of establishment under both the TFEU and the EEA Agreement. In this regard it raises two pleas in law.

13. Article 49 TFEU, in conjunction with Article 54 TFEU, and Article 31, in conjunction with Article 34, of the EEA Agreement in principle prohibit restrictions on the freedom of establishment in an identical manner. ( 8 ) For that reason I will not draw any distinction between those provisions in the examination of the pleas in law.

A – The first plea in law: virtual impossibility of obtaining cross-border group relief

14. By its first plea in law, the Commission considers that the freedom of establishment is infringed because the possibility of obtaining cross-border group relief is virtually impossible under United Kingdom law.

15. The Commission observes that, according to the judgment in Marks & Spencer, cross-border group relief is not required in principle by European Union law. Nevertheless, an exception applies in the case where losses incurred by a foreign subsidiary within the framework of foreign taxation cannot be taken into account either for past or for future tax years. However, section 119(4) of CTA 2010 provides that, at the time immediately after the end of the accounting period in which the loss was suffered, it must be determined whether there is no possibility of future loss relief elsewhere. According to the Commission, such a determination, however, can be made at that moment only if either the State of residence of the subsidiary does not permit loss carry-forward or if the subsidiary enters into liquidation in the tax year in which the loss is suffered. Thus, the possibility of relief is excluded in particular in the case where the subsidiary ceases trading after the tax year in which the loss was suffered. Under the rules, only the loss in respect of a single accounting period may therefore be transferred. According to the judgment in Marks & Spencer, however, the possibility of obtaining loss relief in future accounting periods elsewhere is to be assessed only at the time when the claim for group relief is made.

16. The United Kingdom contends that cross-border group relief is not virtually impossible. The conditions are indeed restrictive, but this is a consequence solely of the Court’s case-law. In particular, according to that case-law, the possibility of having a loss taken into account elsewhere must be tested at the end of the accounting period. This does not, however, preclude the test from taking into consideration the ceasing of trading or an intention imminently to wind up a company that exists at the end of an accounting period. Furthermore, if a test were applied only at the date of the claim for group relief, a taxpayer could, contrary to the case-law, choose the Member State in which its losses are to be taken into account. It would then be able, before making such a claim, to arrange its affairs in such a way that, at the time when it makes the claim, it no longer has any...