Dorsey London Tax Update | Cross Border Group Relief: Recent ECJ Opinions

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Recent Hearings

The DMG case was heard by the House of Lords (Lords Hoffman, Phillips, Scott, Walker and Brown) on 26 and 27 July.  Judgment has been reserved in the usual way and should be expected sometime after the summer vacation.  A summary of the hearing is available on request.

The House of Lords have directed an oral hearing to determine whether leave to appeal will be given in ACT Class 3 to be heard after the DMG judgment is delivered.

Cross Border Group Relief: Recent ECJ Opinions

The current issue with which we are grappling is how to interpret paragraphs 55 and 56 of the ECJ's judgment in the Marks & Spencer case.  The ECJ accepts that group relief provisions can generally deny the surrender of the cross border loss but only  where provision also exists to enable the surrender where the tax payer can demonstrate that the possibilities for use of the loss in the local jurisdiction have been exhausted.  What does this condition mean and does it apply to the UK's group relief provisions (pre FA 2006) which permit of no such exception?

Tax payers will welcome two recent comments by Advocate Generals  of the ECJ  on this topic  .  Previously HMRC had relied upon the remarks of Advocate General Geelhoed in the ACT Class 4 case to the effect that this exception in the Marks & Spencer judgment should be read extremely restrictively.  It is interesting therefore that this same Advocate General in his Opinion in the Thin Cap GLO case (paragraphs 62 and 88) interprets the ECJ's judgment in Marks & Spencer as holding that the UK provisions are precluded and should be disapplied irrespective of how the exception should be interpreted.

Secondly, Advocate General Maduro (who was the Advocate General in the Marks & Spencer case) has in C-347/04 Rewe Zentralfinanz adopted a broad and purposive approach to the interpretation of the exception provided by the Court in the Marks & Spencer case when dealing with related  provisions of German law .  These enabled a German corporate shareholder to depreciate the capital value of its investment in another German company caused by the trading losses of that company, but where the company was non resident the provisions  only allowed a similar deduction as against sources of Revenue from that non resident company.  Advocate General Maduro interprets the ECJ's remarks in the Marks & Spencer case as excluding from the ability to make cross border surrenders only circumstances of fraud or abuse (see paragraphs 30-34).  An English translation of the Opinion in Rewe Zentralfinanz is available on request.

The Court of Appeal has also now delivered its judgment in Condé Naste Publications Limited -v- HMRC concerning the retrospective reduction in the time period for making claims for under-declared input VAT held by the ECJ to breach community law by reason of the lack of a transitional period.  The approach of the Court of Appeal in those circumstances also would seem to support the argument that the exception proposed by the ECJ in the Marks & Spencer case cannot be implied in such a way as to impose difficult evidential burdens upon tax payers. 

Easier References to the ECJ?

The highly important ruling of the ECJ in C-173/03 Traghetti del Mediterraneo SPA -v- Italy has largely gone unnoticed.  In the context of a claim for compensation for unfair competition, the ECJ has ruled that a National Supreme Court can be in breach of community law, when a Claimant can be entitled to compensation, if it fails to refer questions of doubt for a preliminary ruling to the ECJ.  The Court's ruling exhorts National Courts to make references and would seem useful ammunition for Claimants who believe their National Courts may be adopting a fiscally protective approach to community actions.

Damages Claims Extended?

Another important issue is the extent to which claims made under the GLOs  amount to repayment claims as opposed to damages claims.  Damages claims can only be made if certain conditions exist.  Repayment claims exist as of right. 

In the FII and Thin Cap GLOs Advocate General Geelhoed has adopted the broad description of a repayment claim advocated by us in those actions.  If adopted by the Court his approach would enable significant recovery for Claimants who have brought High Court actions.

He has now been joined in this approach by Advocate General Kokott in C-470/04  N.  In her view a repayment claim extends not only to the return in that case of a security deposit required in breach of community law, but to compensation for all the costs (interest, bank charges etc) directly associated with raising the security.  Again this is very supportive of our arguments.

Some Good News  for Dutch Parents  in ACT Class 4

The Advocate General's opinion in the ACT Class 4 case  delivered in February was negative.  The UK provisions provided a full tax credit with the payment of dividend from a UK subsidiary to its UK parent.  No tax credit was provided where the parent was resident in France or Germany.  The Advocate General did not consider that those provisions offended community law.  Parent companies in other jurisdictions, such as The Netherlands, received an abated partial credit.  The Advocate General suggested that in those circumstances, incongruously, community law was offended because the UK exercised taxing rights over the non resident parent and therefore was required to provide a corresponding credit to the UK circumstances.

Therefore, while generally negative, his opinion supports claims by parent companies resident outside France and Germany.  A further support is his opinion in C-513/04 Kerckhaert-Morres.  While in that case he concludes that the Belgian provisions concerned were lawful, he does so because of the existence of compensating provisions for which the UK's treaty credit provisions have nothing similar.  The implication is again that ACT Class 2 parent companies with claims in ACT Class 4 may well succeed.

and (maybe) for US Parents in Thin Cap

In his opinion in the Thin Cap GLO AG Geelheod excluded from recovery claims by third country parented groups.  He did so on the argument that where a claim could be brought as an establishment claim this excluded other types of claims such as free capital movement claims.  Third country Claimants are of course excluded from establishment claims.  Such an approach has not been adopted by the Court before.  It is worth noting that AG Stix Hackl  in her recent opinion in  C-452/04 Fidium Finanz has adopted the traditional approach that the same subject matter can give rise to  free movement of capital claims and at the same time as claims under other  freedoms.