European Law Can Save You Tax

In the run up to the recent European Parliament elections there was much discussion on the so-called devolution of law-making powers to unelected European officials.

I am not going to get into the rights or wrongs of this debate but one thing is for sure when it comes to tax – the European Courts have the final say in determining whether UK tax legislation meets with European law.

A recent example of this involved Marks and Spencer. M&S set up subsidiary companies in France, Germany and Belgium to trade in those respective countries. After a number of years of poor trading, during which significant losses were made by the subsidiaries, the French company was sold and the German and Belgian companies closed down.

M&S submitted claims to surrender the losses from the subsidiaries to the UK parent company to set against the UK company’s profits. Not surprisingly the claim was swiftly rejected by the Revenue as the UK tax legislation clearly stated that only UK losses could be surrendered in such a manner. M&S appealed this decision on the basis that the UK legislation contravened European law and the High Court referred the matter to the European Court of Justice (ECJ).

The ECJ’s judgement was that domestic legislation was not allowed to prevent losses incurred in an overseas subsidiary being set against the parent company’s profits, providing that the overseas subsidiary had exhausted all possibilities of using these losses in its state of residence. The matter was then referred back to the UK Courts to determine whether the subsidiaries had indeed exhausted all possibilities of using the losses in their own countries and it was found that, as there was no realistic possibility of the German or Belgian subsidiaries re-starting trading, they had indeed fulfilled this criteria.

The result was that M&S has been able to utilise the losses incurred by the German and Belgian subsidiaries in a manner that is completely at odds with the UK tax legislation in force at the time therefore proving that, on matters concerning transactions between European member states, European law rules. The M&S case along with a number of others along similar lines has opened up many planning opportunities for UK resident individuals and companies. For example it is possible for a company about t commence a property development in the UK and which would normally suffer significant tax costs on the profit generated can structure their business in such a way that the profits are taxed in another European state where the tax cost would be minimal. Another example is companies holding land as trading stock which can be transferred offshore with the profit on the subsequent sale being taxed in a low-tax jurisdiction rather than the high-tax jurisdiction that is the UK.

More and more UK taxpayers are now taking advantages of the opportunities afforded by the ECJ rulings and, if you are about to start an enterprise where significant profits are expected, or have land held as trading stock in a company it is probably something you would like to consider.

If you would like further information, or discuss your own circumstances, please do not hesitate to contact us.