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Revenue Law Supplement File 1: General Updating |
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The question of loss relief for foreign trades has arisen in two cases. In AMID Case C 141-99 [2003] STC 357 the taxpayer was a Belgian company with a permanent establishment in Luxembourg. Thanks to the Belgian–Luxembourg treaty there was no charge in Belgium on profits of the Lux p.e. In 1981 the Belgian part of the business made a loss but the Luxembourg p.e. made a profit. Under Luxembourg law there was no relief for the Belgian loss. Under Belgian law the 1981 loss could be set against the profits in Luxembourg and so could not be set against the Belgian profits for 1982. The company argued that this was discrimination since Belgian branches abroad were being treated less advantageously than branches only at home. The court agreed. See especially paragraph 34 of Advocate General’s opinion. |
The second loss relief case is the decision of the Special Commissioners where the court declined to allow a UK resident company to use EC law to obtain relief for a loss sustained by a foreign subsidiary. The commissioners underlined their challenge to Luxembourg by declaring that the situation was act clair and so there need be no reference to Luxembourg; since then Park J has allowed an appeal by the taxpayer to the extent of making a reference. Certainly there is much to be said for the Commissioners decision and any reversal of the decision by Luxembourg will look very odd in the historical context. For years there has been a draft directive in giving effect to such losses; for the court to impose such a relief ex cathedra will be interesting to say the least. |
In Marks and Spencer plc v Halsey (Inspector of Taxes) 2003 STC (SCD) 70, the Commissioners held that nothing in Article 43 required that a host state or a state of origin should subject branches and subsidiaries to the same taxation. For direct tax purposes residents of the same state were normally in a comparable position (so that a difference in treatment based on domestic establishment or establishment in another member state infringed Article 43 EC) but residents and non-residents were not normally in a comparable position (and so could be treated differently) unless they were subject to the same direct taxation (paragraphs 58 and 59). Moreover what M and S suffered through choosing to establish through foreign subsidiaries was to find itself subject to different tax rules; this should not be treated as a restriction equivalent to being excluded from other markets but a reflection of the failure of member states to harmonise their corporate tax systems. The application of different conditions for pursuing economic activities in different member states did not amount to discrimination. Further, there had been no recent development of the principles such as to require a reference to the Court of Justice of the European Communities for a preliminary ruling on the matter (paragraphs 60 and 61). |
In summary they also held that the UK could invoke the cohesion argument; the restrictions were objectively justified by the logic or internal consistency of the tax system, suitable for their purpose and proportionate (despite the fact that the UK rule meant that no losses of the foreign subsidiary could be transferred) paragraphs 107–115. They also said that although established case law had framed the cohesion justification at the level of a single tax and a single taxpayer, they felt that it could be applied where there were two taxpayers but only one tax was involved. |
Issues arising out of the old ACT system make it clear that the abandonment of that system was prompted at least in part by a fear of what the Luxembourg court might do in Pirelli Cable Holdings NV v IRC [2003] EWHC 32 (ch), 2003 STC 250 UK resident companies had paid ACT but now sought compensation or restitution in the form of interest for the period between the repayment of ACT and its set off against mainstream corporation tax or, if no mainstream ACT liability had arisen, compensation equal to that unused sum. Under the dividend article of the relevant tax treaty the non-resident shareholder companies were entitled to a tax credit on the dividends paid by their UK subsidiary; they were liable to UK tax on the aggregate of the tax credit and the dividend and to the payment by the Revenue for any of the excess of the credit. Could these payments be treated as relevant ‘countervailing advantages’ which could be used to offset the claims brought by the UK resident companies? Park J rejected the Revenue arguments. The relevant treaty payments by the Revenue were due whether or not there was a group income election. Even if this were incorrect the Revenue could only use them to reduce the liability if the resident and non-resident companies could be treated as a single person—which they could not. |
Lankhorst-Hohorst GMBH v Finanzamt Steinfurt Case C-324/00 2003 STC 607 is another distressing case for traditionalists. A Dutch parent had a German subsidiary. The German subsidiary had a loan from an independent third party at commercial rates of interest and was in some difficulty so the Dutch parent made it a softer loan so that it could pay off the third party. The interest from the German company to the Dutch parent was recharacterised as dividend (under ‘thin capitalisation’ rules). The Commission argued |