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Wednesday, 17th April 2024
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EU Law can lower tax Back  
Irish corporates have an opportunity to reduce their tax bills by using EU law. Cases currently before the European Court of Justice (ECJ) are likely to overturn our existing understanding of tax rules.
Marks & Spencer‚€ô losses

Marks & Spencer Plc are a UK resident company. They are liable to UK corporation tax on their profits. They owned a subsidiary in France which had incurred trading losses. That subsidiary was not within the UK corporation tax net since it was not resident in the UK nor trading there. Under conventional tax rules as applied in the UK and in Ireland, relief is not available for the losses of foreign subsidiaries which are outside the tax net.

Marks & Spencer have challenged this conventional interpretation of tax law and the case has been referred to the European Court of Justice.

Marks & Spencer point out that, if their French operations had been conducted through a UK resident company, they would be entitled to relief for the losses incurred by that company, against the profits of other group companies in the UK. They are denied that relief where the company is resident instead in France. Their freedom to establish their business where they choose is being interfered with and their choice is being penalised.

On the basis of previous case law before the ECJ, there seems a good chance that Marks & Spencer will succeed in their claim. Of course the matter cannot be certain until the ECJ finally rules.

While it might be thought fair and logical that relief be denied in Ireland for overseas losses in circumstances where overseas profits would not be subjected to tax in Ireland, this logic does not necessarily follow in the context of European law. As far as possible Irish companies and foreign companies in similar situations must be treated in the same way. If relief is available for Irish losses, it would follow that relief must be available for other EU losses.

It is open to Ireland to claw back the relief granted, once the foreign company becomes profitable. A complete denial of relief is a disproportionate reaction to the fact that the foreign resident company is not taxable in Ireland.

Other forms of loss relief
Marks & Spencer Plc are concerned with relief for trading losses which have arisen in a group member resident in the EU outside the UK. However the same principles apply to losses other than trading losses.

Already a case from Germany has come before the European Court of Justice concerned with rental losses. The German company had taxable rents in Germany, and had losses on foreign rental properties. It was denied relief in Germany against its rental income for its foreign rental losses. It is appealing this treatment to the court.

Ireland similarly would not permit relief in that circumstance. It is questionable whether ring fencing foreign loss relief to offset against foreign income meets Ireland‚€ôs obligations under EU law. There is no logical reason why an investment in an Irish property (which could generate losses offsetable against Irish rental income) should be treated differently to an investment in property in another EU member state.

Foreign dividends
In general an Irish resident company is not charged to tax on dividends received from another Irish resident company. There is an exception relating to dividends on preference shares but it is an anti-avoidance measure of limited relevance. However an Irish company is liable to tax on dividends received from non-resident companies. Generally it will receive credit for the foreign taxes borne by the dividend, and, in some cases, for underlying tax paid by the company from which the dividend is received. In many instances therefore no Irish tax liability arises because the foreign tax credits exceed the Irish tax.

However in any case where a foreign tax liability does arise on the receipt of a foreign dividend by an Irish resident company, the discriminatory treatment compared to dividends from Irish resident companies may be open to challenge in the European Court of Justice. It is expected that a case on this general issue will appear before the European Court shortly.

Not all one way
Not all of the tax breaks which the European Court of Justice may explore will accrue to Irish resident companies. The same principles as are outlined above can apply to require other member states of the EU to have regard to losses arising in Ireland in a group. If the European Court of Justice find in favour of Marks & Spencer, it may be the case that, to take an example, all trading loss arising to an Irish subsidiary of the UK company might be available for tax relief against trading income arising in the UK, or indeed in other group members resident in other member states of the EU.

Many member states of the EU have so called ‚€ėthin capitalisation‚€ô rules. These are rules which limit a deduction for interest expense, especially in the context of interest paid to related parties, or on group guaranteed debt. Typically thin capitalisation rules do not apply in a country to a company which is a member of a group located in that country. It is usually applied only to subsidiaries in that country of groups resident abroad.

The European Court of Justice, in a recent case (Lankhorst Hohorst) held that such rules were contrary to EU law in discriminating against a foreign controlled company. There may be Irish based holding companies whose subsidiaries in other member states of the EU have suffered such discrimination and who may accordingly be entitled to tax refunds.


What to do
It is by no means a straightforward matter to re-open past tax years in order to claim the advantage of a change in the understanding of tax rules brought about by a European Court of Justice judgement. Those who feel they can take advantage of the areas of controversy outlined above need to consider recent past years, the most recent tax year for which they have not yet made a return, and the current and future years. This is an area where it is important to talk to an experienced tax adviser at an early date.

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