EU - Transferring group relief - Treaty on the Functioning of the EU

Revenue and Customs Commissioners v Philips Electronics UK Ltd C-18/11: Court of Justice of the European Communities (Fourth Chamber): Judges Bonichot (rapporteur) (president), Prechal, Schiemann, Bay Larsen, Jarasiunas: 6 September 2012

In the instant proceedings, the taxpayer company was resident in the UK for tax purposes. It formed part of the Philips group, whose parent company was established in the Netherlands.

The parent company entered into a joint venture with a South Korean group, LG Electronics. The joint venture had a Dutch subsidiary, LG Philips Displays Netherlands BV (LGPD Netherlands), which had a branch (permanent establishment) in the UK. Philips Electronics UK sought to set against its own profits part of the losses suffered by the permanent establishment of LGPD Netherlands in the tax years 2001 to 2004. That request was rejected by the UK tax authorities – one ground for that rejection had been that the losses of LGPD Netherlands could be set against that company’s profits in the Netherlands.

The First-tier Tribunal (FTT) found in favour of Philips Electronics UK. The UK tax authorities then appealed to the Upper Tribunal (Tax and Chancery Chamber). The Upper Tribunal decided to stay the proceedings and to refer four questions to the Court of Justice of the EU for a preliminary ruling.

The questions were, inter alia: (1) where a member state (such as the UK) included in its tax base the profits and losses of a company incorporated and resident in another member state (such as the Netherlands), to the extent that the profits were attributable to a business carried on by the Netherlands company in the UK through a permanent establishment situated in the UK, was it a restriction on the freedom of a national of a member state established in the UK under article 49 (formerly article 43 EC) of the Treaty on the Functioning of the EU (TFEU) for the UK to prevent the surrender of the UK losses of permanent establishment situated in the UK (of a non-UK resident company to a UK company) by way of group relief, where any part of those losses were represented in an amount which, for the purposes of any foreign tax was (in any period) deductible from or otherwise allowable against non-UK profits of the company; that is, to permit the surrender of UK losses in the case of a permanent establishment situated in the UK only where it was clear that at the time of the claim there could never be any deduction or allowance in any state outside the UK (including another member state), and was it sufficient that relief available overseas had not in fact been claimed in circumstances where there was no equivalent condition applicable to the surrender of UK losses of a UK resident company;

(2) if so, was that restriction capable of being justified: (a) solely on the basis of the need to prevent the double use of losses, or (b) solely on the basis of the need to preserve the balanced allocation of taxing powers between member states, or (c) on the basis of the need to preserve the balanced allocation of taxing powers between member states in conjunction with the need to prevent the double use of losses; (3) If any restriction on the rights of the Netherlands company was not justified or to the extent that it was not proportionate to any justification, did EU law require the UK to provide the UK company with a remedy such as the right to claim group relief against its profits.

The court ruled: (1) Article 43 of the EC Treaty should be interpreted as meaning that where, under national legislation of a member state, the possibility of transferring by means of group relief and to a resident company, losses sustained by the permanent establishment in that member state of a non-resident company, was subject to a condition that those losses could not be used for the purposes of foreign taxation, and where the transfer of losses sustained in the member state by a resident company was not subject to any equivalent condition, such provisions constituted a restriction on the freedom of a non-resident company to establish itself in another member state (see [20] of the judgment).

Cie de Saint-Gobain, Zweigniederlassung Deutschland v Finanzamt Aachen-Innenstadt C-307/97 [1999] All ER (D) 1029 considered; Marks & Spencer plc v Halsey (Inspector of Taxes) C-446/03 [2005] All ER (D) 174 (Dec) considered.

(2) A restriction on the freedom of a non-resident company to establish itself in another member state, such as that at issue in the main proceedings, could not be justified by overriding reasons in the public interest based on the objective of preventing the double use of losses or the objective of preserving a balanced allocation of the power to impose taxes between the member states or by a combination of the two grounds (see [35] of the judgment).

(3) In a situation such as that in the main proceedings, the national court should disapply any provision of the national legislation which was contrary to article 43 of the EC, (see [40] of the judgment).