By Nicola Hine
The ECJ has delivered judgment today in Case C-80/12 Felixstowe Dock and Railway Company and Ors, a consortium relief case referred from the FTT. The ECJ ruled that legislation which disallowed consortium relief in circumstances where a link company was based in Luxembourg breached the freedom of establishment.
The claimants were UK resident companies who were part of a Hong Kong owned group. Consortium relief had been claimed for losses of a UK resident consortium company. The “link company” (being the company common to both the consortium and the group within the meaning of s406(1)(a) ICTA 1988) was Luxembourg resident. The loss making consortium company elected to surrender its losses to the UK claimant group in order to off set those losses against the group’s taxable profits. HMRC rejected the claims on the basis that the link company was neither UK resident nor did it carry on a trade in the UK through a permanent establishment, as required by the legislation.
The claimants appealed and the FTT referred the matter to the ECJ for preliminary ruling. The ECJ found that the UK legislation produced a difference in treatment as between domestic link companies and those based in other Member States. Such a disparity may only be permissible where it may be justified by an ‘overriding reason in the public interest’ or where the circumstances are not objectively comparable. As to the latter, the Court found that the comparability of a domestic and cross-border situation was undisputed. On the former, no reasons of public interest were advanced by the UK government, and the question of whether such a justification was left for the national court to decide. Although this point was remitted to the FTT, the ECJ made it clear that the restriction created by the legislation could not be justified by “overriding reasons in the public interest relating to the objective of preserving a balanced allocation of powers of taxation between the Member States or to combating purely artificial arrangements”.
The important feature of the judgment is that, the presence of intermediate companies, or parent companies, based outside the EU/EEA did nothing to affect this analysis. The Court ruled that neither the residence of a company’s shareholders, nor the residence of ultimate parent and intermediate companies, had any bearing on the unlawfulness of the consortium relief provisions or the rights of EU resident companies to rely on the freedom of establishment. The freedom of establishment was already engaged by the residence of the link company; the claimant companies can rely on this restriction themselves as they are linked to the company and the restriction affects their own taxation.
This decision is useful in the context of claims by corporate groups engaging EU law where the ultimate parent is not EU resident.
This article appears in the JHA April 2014 Tax Newsletter.
