UK Corporate Write-Off Scheme Clears EU Court

(CN) - A change in British corporate tax law to non-U.K. companies to conditionally offset profits and losses with their U.K. subsidiaries complies with EU tax law, Europe's highest court ruled Tuesday.

The case stems from a decade-long dispute between the United Kingdom and the European Commission. In 2006, the European Court of Justice found that British tax law unfairly penalized companies with subsidiaries in other nations - retailer Marks & Spencer, in that case - by not allowing them to offset the profits and losses from locations outside the United Kingdom.

Following that decision, the U.K. amended its tax legislation to conditionally allow cross-border offsetting. The conditions require subsidiaries outside Britain to exhaust all possibilities of writing off losses in current or previous accounting periods, and substantially limit what losses they can carry forward into future years.

The commission objected to the new rules, arguing that they make it virtually impossible for British companies to write off cross-border losses unless the member states where their subsidiaries are located have no write-off provision. The U.K. law also requires that companies must begin liquidating failing subsidiaries before the end of the accounting year that losses are sustained - making it even more difficult for British companies to offset the losses, the commission claimed.

On Tuesday, the EU high court dismissed the commission's freedom-of-establishment action completely, finding the regulators' first situation irrelevant. Existing rules already allow member states where corporations are based to bar cross-border write-offs for subsidiaries in other states that prohibit carrying losses forward, the court said.

As to the commission's second claim, the Luxembourg-based court said the regulatory body failed to prove that U.K. law requires companies to begin liquidating nonresident subsidiaries in the same accounting year that losses occur in order to claim the offset.

"Losses sustained by a nonresident subsidiary may be characterized as definitive as defined by the Marks & Spencer case only if that subsidiary no longer has any income in its member state of residence," the 5-page opinion stated. "So long as that subsidiary continues to be in receipt of even minimal income, there is a possibility that the losses sustained may yet be offset by future profits made in the member state in which it is resident."

The court also noted that the commission failed to show any instances where cross-border offsets weren't allowed for losses that occurred before the amended legislation went into effect, following the 2006 Marks & Spencer ruling.

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