necessary to attain the essential part of the objective of achieving a balanced
allocation of tax jurisdiction. Advocate General Geelheod is of the view that this
caveat should be applied extremely restrictively.19
The Marks & Spencers case was highly controversial and was watched closely by all
Member States with corporation tax systems containing similar group relief
provisions. Meussen (2005) indeed suggests that the case was “one of the most
important, if not the most important, case concerning EU corporate tax”.
By offering the possibility that a group of companies might be able to transfer their
losses to the Member States which apply the highest rates of taxation, the judgement
should serve to reduce the disincentive effect of high tax rates for FDI inflows.
Cross-Border Transfer Of Assets
Most Member States operate some form of group relief which allows intra-group
transactions on a tax-free basis. The problem is that these provisions are not usually
extended to cross-border situations. The thrust of EU rulings is that they should be.
X AB and Y AB concerned a Swedish group relief scheme that allowed tax-free
transfers of assets between group companies.20 Both companies had to be resident in
Sweden, though relief was also available if the Swedish subsidiary was wholly owned
by the Swedish parent indirectly by way of wholly-owned intermediate companies in
another Member State. However, the relief was denied if the Swedish subsidiary was
wholly owned by way of wholly-owned intermediate companies in more than one
other Member State. The ECJ held that this was clearly in breach of the right of
establishment under Article 43.
The case Metallgesellschaft & Hoechst was not directly concerned with the cross-
border transfer of assets but rather related to the UK’s advanced corporation tax (ACT)
system.21 A subsidiary member of a group did not have to pay ACT on dividends
paid to its parent so long as both companies were resident in the UK. The ECJ held
that groups of companies with a foreign parent company could not be treated
differently from groups of companies with a domestic parent company.
The extension of group relief to cross-border situations is likely to enhance
multinationality (i.e. the extent to which firms have operations outside their home
location or are headquartered abroad) and lead to increased FDI flows.
Thin Capitalisation/Transfer Pricing Rules
If a parent company injects funds into a subsidiary in the form of a capital loan
instead of a capital contribution (equity), the profits of the subsidiary are transferred
to the parent company in the form of deductible interest rather than non-deductible
dividends. If the two companies are in different countries, the tax debt can be
transferred from one country to another at the will of the parties concerned. As noted
earlier, similar considerations make it more attractive to use inter-company debt to
expand in high-income-tax countries and to use equity to expand in low-tax countries.
19 Opinion on Class IV ACT Group Litigation (Case C-374/04) 23 February 2006 at para. 65.
20 X AB and Y AB v Riksskatteverket (Case C-200/98) [1999] ECR I-8261.
21 Metallgesellschaft Ltd. and Others (Case C-397/98) & Hoechst AG, Hoechst UK Ltd. (Case C-
410/98) [2001] ECR I-1727.
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