UK: Cross-border loss compensation

[Dodd]

UK: Cross-border loss compensation

On the September 18 2008, the European Commission sent the UK a formal request, in the form of a reasoned opinion, to properly implement the ECJ's findings in the Marks & Spencer case (Case C-446/03 of December 13 2005).

In this case, the court ruled that the UK's group relief rules which permitted losses to be transferred from UK subsidiaries to other group companies but did not permit losses to be utilised from non-UK group subsidiaries were too restrictive. The court held that the losses should be capable of offset in the UK based group but only after the possibilities for using the losses in the subsidiaries' home states have been exhausted.

The UK made changes to its legislation, however the Commission states that the "UK still imposes conditions on cross border group relief which in practice make it impossible or virtually impossible for the tax payer to benefit from tax relief pursuant to the judgment in Marks & Spencer".

Of particular concern to the Commission are the restrictive interpretation of the condition that there should be no possibility of use of the loss in the state of the subsidiary and the various dates and time limits which dictate the applicability of the relief.

The UK has two months to reply satisfactorily to the reasoned opinion or the Commission may refer the matter to the European Court of Justice.
Foreign profits update

On September 16 2008 the government provided an update of the review of the taxation of foreign profits. The government still favours the introduction of a corporation tax exemption for foreign dividends, however, this now looks unlikely to be in place in time for finance bill 2009.

With respect to controlled foreign companies, it was confirmed that the government is now concentrating on reforming the current entity-based approach.

On September 29 2008, WPP group became the latest UK group to announce that they will be redomiciling. The new holding company will be incorporated in Jersey and tax resident in the Republic of Ireland. Does this mean that these latest announcements are too little too late?

Jane Dodd ([e-mail]), London