wished to off-set losses arising from these subsidiaries against their UK taxable group
profits. This was refused by the UK tax authorities on the basis that the subsidiaries
were operating outside the UK, and the case went to the ECJ.
The UK tax legislation was doubly called into question; firstly, because it did not
accord the same advantages to parent companies with foreign subsidiaries and parent
companies with foreign branches, and secondly because it placed groups of
companies wishing to establish themselves abroad at a disadvantage in relation to
groups resident in the UK.
The Court noted that the UK group relief provisions constituted a tax advantage for
the companies concerned. By speeding up the relief of the losses of the loss-making
companies by allowing them to be set off immediately against the profits of other
group companies, such relief conferred a cash advantage on the group. The exclusion
of such an advantage in respect of the losses incurred by a subsidiary established in
another Member State which did not conduct any trading activities in the UK was of
such a kind as to hinder the exercise by that parent company of its freedom of
establishment by deterring it from setting up subsidiaries in other Member States.
The Court then considered whether the restriction could be justified. The UK and
other Member States had argued that in the context of the group relief system,
resident subsidiaries and non-resident subsidiaries were not in comparable situations.
They pointed out that in accordance with the principle of territoriality applicable both
in international law and in Community law, the Member State in which the parent
company was established (the UK) had no tax jurisdiction over non-resident
subsidiaries. The ECJ was of the view that the fact that a Member State did not tax
the profits of the non-resident subsidiaries of a parent company established in its
territory did not in itself justify restricting group relief to losses incurred by resident
companies.
The United Kingdom and the other Member States which submitted observations put
forward three factors to justify the restriction. First, that in tax matters profits and
losses are two sides of the same coin and must be treated symmetrically in the same
tax system in order to protect a balanced allocation of the power to impose taxes
between the different Member States concerned. Second, if the losses were taken into
consideration in the parent company’s Member State they might well be taken into
account twice. Third, if the losses were not taken into account in the Member State in
which the subsidiary was established there would be a risk of tax avoidance.
The Court agreed, “in the light of those three justifications, taken together”, that the
restrictive provisions pursued legitimate objectives compatible with the Treaty, that
they constituted valid public-interest reasons, and that they were apt to ensure the
attainment of those objectives. The phraseology used by the Court however makes it
difficult to discern the particular weight attached to each justification.
The Court nevertheless concluded that the measures were excessive, and that the
member state of the resident company should allow relief for losses when the non-
resident subsidiary had exhausted all the possibilities available for having the losses
taken into account in its state of residence. The Court explained this caveat on the
basis that to deny group loss relief in such circumstances would go beyond what was
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