Tax collectors can wear M&S ruling

By Anna McLauchlin

Date: 15/12/05

There was a collective sigh of relief from treasuries around the EU on Tuesday (13 December) when the European Court of Justice (ECJ) handed down a tax ruling partially in favour of UK retailer Marks and Spencer, but public finances could still suffer some unpleasant consequences.

The ECJ ruled that M&S was entitled to include losses incurred at its foreign subsidiaries in France, Belgium and Germany in its UK tax return, but only if there was no way that the losses could be re-used to offset any profits in the foreign jurisdiction.

The UK treasury, which had feared it could be hit by other company claims running into billions of euros, said that the judgement meant that "the UK's existing system of Group Relief can be preserved, broadly, as it is now".

Around 80 companies in the UK have already lodged complaints on similar lines to M&S. The ECJ ruled that a parent company should not be prevented from offsetting the losses of foreign subsidiaries.

To do so would be to deny freedom of establishment. But it added a proviso that the company must have "exhausted the possibility" of re-using the loss for present or future tax calculations, which means that many of these companies will not be able to benefit from the M&S ruling.

"If you look at the list, most of those companies will fall by the wayside because they are continuing to make profits in their foreign subsidiaries," said Bill Dodwell, tax partner at consultant Deloitte UK. "The ECJ has delivered a nicely balanced decision. It says that the UK was wrong to prevent Marks and Spencer from offsetting their losses in foreign subsidiaries but it doesn't open the floodgates."

But others are less sure about how the ruling will be applied in practice across Europe. Fourteen other member states allow companies to offset losses only from domestic subsidiaries rather than those based in other member states and will have to take account of the judgement.

"It's true that the financial impact, if only for the UK government, could have been much, much worse, but the decision still carries with it some uncertainties as to how it's going to work in practice," said Olivier Rousselle, tax associate at JonesDay in Brussels.

He added that the ruling could encourage businesses to close down foreign subsidiaries specifically to apply the cross-border loss principle. "This possibility is left open by the court," he said.

Commission officials said the case showed that national governments should not leave tax policy to be set by the ECJ.

The ruling confirmed, a Commission spokeswoman said, the need for member states to work together "to ensure that the burden of losses does not fall on one member state".