A Germany limited partnership sought to repatriate the losses of its Luxembourg P.E. in circumstances where the double tax convention exempted from tax in Germany branch profits and in turn therefore did not give credit for branch losses. Can it do so despite the terms of the DTC and even where the branch losses could be carried forward and used in Luxembourg in the future?
In February the Advocate General believed that it could, noting the cash flow disadvantage which would result from carrying losses forward as opposed to repatriating them in the year in which they arose.
The Court has not followed its Advocate General's lead, but has restricted its answer to an application of the Marks & Spencer case. As the losses of the Luxembourg branch in 1999 were used against its branch profits in 2003, they could not be repatriated instead.
The Court acknowledges that a cash flow disadvantage exists from the inability to use losses in the same year, but that this disadvantage can be justified by the objectives of a balanced allocation of taxing powers, the prevention of double dipping and "loss shopping".
The judgment does provide some limited additional insights into the principles laid down in the Marks & Spencer case. It is difficult to see, on the current status of the law, that it would be possible to surrender for cross border group relief a loss actually utilised in the other jurisdiction. Secondly, it is not critical that all three objectives exist to justify a restriction of group relief to domestic losses. In the Lidl Belgium case it was sufficient that the restriction prevented double dipping and protected the allocation of taxing powers.
More positively the Court's application of the Marks & Spencer principle, makes no reference to the need to attempt to "sell" the losses or the loss making subsidiary before the losses can be surrendered cross border. It also explicitly limits the circumstances which must be taken into account to the possibilities of utilisation in the state where the losses are incurred (paragraph 47). This must challenge the precedence condition introduced as paragraph 9 schedule 18A ICTA in 2006, requiring consideration to be made of other jurisdictions in which the loss might be utilised before it would be capable of cross border surrender to the UK.
The Court has also dismissed, without obvious explanation, what did seem to be a killer point made by the tax payers, the Commission and taken up by the Advocate General. A restriction on Community rights such as this cannot extend beyond the minimum necessary to attain its objective. Here until 1999 Germany did provide for the repatriation of utilisable branch losses with a claw back provision. Clearly therefore a less restrictive measure was possible, as it had actually been in force. The Court does not find this a persuasive point but does not really say why.
It should be noted that the judgment was given by a 5-judge Chamber (rather than the full court) which would have limited room for manoeuvre in departing from the principles in Marks & Spencer.
The judgment offers no guidance as to when a possibility will be exhausted, given that in this case the losses had been used within a four year period.
C-201/05 CFC And Dividend GLO
On 23 April 2008, the ECJ issued a "Reasoned Order" in the CFC & Dividend GLO, proceeding directly to its decision and thus skipping both the hearing and Advocate General's opinion. This procedure is used when the Court concludes that the questions asked of the Court have been answered in other judgments. Here, the Court has relied on its previous judgments in C-196/04 Cadbury Schweppes plus those in other GLOs, C-374/04 ACT Class IV, C-446/04 FII and C-524/04 Thin Cap.
The Reasoned Order thus follows those judgments very closely. In a couple of areas, however, its application of those judgments to the questions asked in this GLO produces some additional insights. One particular area arises in its response to the questions concerning the compliance burden imposed by the UK's CFC provisions. The Court had already ruled that the UK provisions will be precluded if the national court fails to find that the motive test "lends itself to an interpretation which enables the taxation provided for by that legislation to be restricted to wholly artificial arrangements". In the Reasoned Order, it is clear that the same analysis is applicable to all other exemptions as well, including therefore the ADP, exempt activities and ECL exemptions.
Thus, a compliance burden will be disproportionate and contrary to community law if it goes beyond the minimum restriction necessary to attain its objective. Here the objective is to determine whether the CFC is physically established in the non resident State.
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