"1. Whether, in light particularly of any applicable principles of EU law, section 406(2) ICTA 1988, or any other provision, applies so as to prevent consortium relief from being available on the basis that the relevant link companies (as that term is defined in section 406(1) ICTA 1988), being Koninklijke Philips Electronics NV and Philips GmbH, although resident at all times in an EU Member State, were not at any relevant time within the charge to UK corporation tax, and 2. Whether, in light particularly of any applicable principles of EU law, section 403D ICTA 1988 (entitled 'Relief for or in respect of non-resident companies'), or any other provision, applies so as to prevent consortium relief from being available by reference to the prospect of those losses being utilised (as more fully spelt out in section 403D ICTA 1988, or such other relevant provision), in any period, for the purposes of Dutch corporate income tax or any other non-UK tax."
"It remains to consider the question of disapplication in accordance with the provisions of s 2(1) and (4) of theEuropean Communities Act 1972 (the 1972 Act). Explaining the effect of the section in R v Secretary of State for Transport, ex p Factortame Ltd[1990] 2 AC 85 , Lord Bridge of Harwich said (at 140): 'By virtue ofsection 2(4) of the Act of 1972 Part II of the Act of 1988 [the Merchant Shipping Act] is to be construed and take effect subject to directly enforceable Community rights and those rights are, bysection 2(1) of the Act of 1972, to be "recognised and available in law, and ... enforced, allowed and followed accordingly; ..."
"13. I should mention that the appellant did try to join the parent company in this appeal which was refused by my colleague Dr Brice at a preliminary hearing. Since the parent company is not a UK taxpayer it is difficult to see what purpose could be served by joining it. If the parent company suffers a restriction on its freedom of establishment (or discrimination) because of the appellant paying an increased amount of tax, that can be dealt with in these proceedings."
"48. A third restrictive consequence of the fact that direct tax systems are national is the necessity to divide tax jurisdiction over the income of cross-border economic operators (dislocation of tax base). As with disparities, these restrictions should be distinguished from discrimination, as they result not from the rules of just one tax jurisdiction, but from the co-existence of two separate tax jurisdictions (ie, no one tax jurisdiction is to blame for the tax disadvantage). However, unlike disparities, they would continue to exist even if national tax systems were exactly the same in design and content. 49. The nature of this type of restriction can be explained quite simply. Clearly, the co-existence of national tax systems means that, in order to deal with cross-border economic operators, it is necessary to decide how these systems interact. In particular, a state must choose a criterion by which it decides which part of an economic operator's income falls within their tax jurisdiction. In the present state of international tax law, one of the most important methods of dividing tax jurisdiction is based on the distinction between 'home state' (taxation of residents) and 'source state' (taxation of non-residents) taxation. [3] 50. In the case of home state taxation, the state of residence of the taxpayer has in principle tax jurisdiction over its total income ('worldwide' taxation). A principal rationale behind this is that the place where the taxpayer uses most facilities (eg, public services, social security, infrastructure etc) is his state of residence. In contrast, in the case of source state taxation, the state of the non-resident has tax jurisdiction only over that part of the non-resident's income that is earned within the source state's territory ('territoriality' taxation). A principal rationale for this is that it is the source state which provides the 'economic opportunity' to earn this income. 51. As a consequence of this way of dividing tax jurisdiction, an economic operator earning foreign-source income may, in the absence of priority rules between the relevant states, be subject to juridical double taxation. Under international tax law, the generally accepted rule of taxation priority is that of 'source country entitlement': that is, priority of taxation right over source country income lies with the source state. Insofar as juridical double taxation is to be relieved, therefore, this is in principle a matter for the home state, which can choose whether and how it wishes to provide such relief. [4] For example, a state may choose to relieve juridical double taxation unilaterally or by DTC; and using an exemption or credit method. [5] Clearly, therefore, the distinction between residents (home state, worldwide taxation) and non-residents (source state, territorial taxation) is crucial to the current division of tax jurisdiction between states, as reflected in international tax law. … 55. To repeat, where a restriction on freedom of establishment results purely from the co-existence of national tax administrations, disparities between national tax systems, or the division of tax jurisdiction between two tax systems (a quasi-restriction), this should not fall within the scope of art 43 EC. In contrast, 'true' restrictions, that is to say, restrictions to free movement of establishment going beyond those resulting inevitably from the existence of national tax systems, fall under the art 43 EC prohibition unless justified. In the terminology used above, in order to fall under art 43 EC, disadvantageous tax treatment should follow from discrimination resulting from the rules of one jurisdiction, not disparity or division of tax jurisdiction between (two or more) member states' tax systems. 56. As I recalled above, the court has held that discrimination consists in the 'application of different rules to comparable situations or in the application of the same rule to different situations'. [6] 57. In my view, it follows as a consequence of the method of dividing tax jurisdiction adopted by member states—that is, the distinction between worldwide (home state) and territorial (source state) tax jurisdiction—that the concept of discrimination applies in different ways to states acting in home state and source state capacity. Quite simply, as the nature of the tax jurisdiction being exercised in each case differs fundamentally, an economic operator subject to home state jurisdiction cannot per se be considered to be in a comparable situation to an economic operator subject to source state jurisdiction, and vice versa. As a result, art 43 EC imposes two different categories of obligation on a state, depending upon the jurisdictional capacity in which it is acting in a particular case. i) Article 43 EC home state obligations 58. The central obligation imposed on states exercising home state jurisdiction is, in essence, to treat foreign-source income of its residents consistently with the way it has divided its tax base. Insofar as it has divided its tax base to include this foreign-source income—ie, by treating it as taxable income—it must not discriminate between foreign-source and domestic income. This principle has been illustrated in the court's case law. Thus, in the case of corporate income taxation for example, the court has held that: – Insofar as it chooses to relieve economic double taxation on its residents' dividends, a home state, with tax jurisdiction over the worldwide income of its residents, must provide the same relief for incoming foreign-source dividends as for domestic dividends, and must take foreign corporation tax paid into account for this purpose. [7] – Similarly, where a home state offers the possibility to offset domestic losses against domestic prior or future profits, this possibility cannot be denied on the sole ground that the relevant company also earns foreign-source income. [8] – In addition, where a state makes group income relief from the obligation to pay ACT available to domestic subsidiaries distributing profits to domestic parents, it must extend this possibility to domestic subsidiaries distributing profits to foreign parents, which subsidiaries would otherwise be subject to ACT. [9] 59. Conversely, in Marks & Spencer, the court held that, in principle, insofar as a member state does not exercise tax jurisdiction over a non-resident subsidiary of a resident parent company, then it does not have to give loss relief. [10] Put otherwise, if a home state has divided its tax base so that it does not exercise tax jurisdiction over a foreign subsidiary of one of its corporate residents, it is in principle consistent for that state to refuse to take into account deductions relating to that foreign-source income in assessing its resident's tax. … ii) Article 43 EC source state obligations 66. As source states have tax jurisdiction only over the income that is earned by the non-resident within the source state's jurisdiction, they are subject to a more limited obligation under art 43 EC. In essence, this can be expressed as an obligation to treat all non-residents in a comparable way to residents (non-discrimination), insofar as these non-residents fall within their tax jurisdiction—ie, subject to the difference in the extent of their tax jurisdiction over residents and non-residents. 67. In the case of corporate income taxation, this obligation has been applied to mean, for example, that: – Tax benefits accorded to resident companies—including those granted pursuant to DTCs [11] —must be accorded in the same way to branches (permanent establishments) of non-resident companies if these branches are otherwise subject to corporation tax in the same way as resident companies. [12] Thus, for example, branches of non-resident companies are entitled to the same imputation credits for dividends received if they are taxed on these dividends in the same way as resident companies. [13] – In addition, insofar as a source state exercises tax jurisdiction over a foreign branch, it cannot impose a higher corporate tax rate on this branch than applied to its own resident companies. [14] – Nor can a source state subject only outgoing interest repayments on a loan to a resident subsidiary from a controlling non-resident shareholder to, eg, minimum capitalisation requirements (thin capitalisation rules), while not subjecting domestic repayments to any such requirement, unless such a requirement is justified. [15] – Conversely, the court has held that the fact that, for the purpose of calculating the basis of assessment to tax for non-resident taxpayers, a source state only takes into account profits and losses arising from their activities in that state—and not, for example, losses arising in their home state—is in no way prohibited by the Treaty. [16] – Further, source states should not impose disproportionately heavy administrative or accounting requirements on foreign companies active within their territory (ie, requirements that go beyond what results from the fact that tax administrations are national), including where compliance with these requirements is necessary to avail of a tax benefit relating to source state income. [17] … 69. A further application of the source state non-discrimination obligation is that, insofar as a source state chooses to relieve domestic economic double taxation for its residents (for example, in taxation of dividends), it must extend this relief to non-residents to the extent that similar domestic double economic taxation results from the exercise of its tax jurisdiction over these non-residents (for example, where the source state subjects company profits first to corporation tax and then to income tax upon distribution). This follows from the principle that tax benefits granted by the source state to non-residents should equal those granted to residents insofar as the source state otherwise exercises equal tax jurisdiction over both groups." [18] (3) We are dealing here with source state tax obligations for which the principle is, as the Advocate General says in para 66 "…an obligation to treat all non-residents in a comparable way to residents (non-discrimination), insofar as these non-residents fall within their tax jurisdiction."
"47. It is clearly apparent that in all those cases [ Avoir fiscal, Saint-Gobain and Royal Bank of Scotland ] discrimination in the choice of form of establishment is inextricably bound up with discrimination as to the choice of place of residence. That is owing to the fact that the state concerned chose to place the different forms of establishment on the same footing for the purposes of taxation in its territory. If in such a case a difference of treatment is none the less established it is because it in fact conceals a case of discrimination on the ground of nationality as against the companies operating those establishments. 48. In the present case foreign subsidiaries and branches are indeed governed by different tax regimes. However, that difference in treatment is not due solely to the fact that they are subject to different tax obligations but to the United Kingdom system of corporate taxation. Under that system the difference in tax treatment is determined by the legal form of the secondary establishment. Groups of companies are not entitled to consolidation for tax purposes which applies to the income of permanent establishments. In that connection, although the group relief system modifies the rule of separate taxation of group companies, it cannot have the effect of assimilating the situation of subsidiaries to that of branches. Under that regime the transfer of losses is treated in a specific way. There is no consolidated joint taxation. That is because subsidiaries are always treated as independent legal and fiscal entities. Accordingly, the difference in treatment of those two categories of establishment does not merely comprise loss of a specific benefit as a result of the option being made in favour of the establishment of foreign subsidiaries. It stems from a difference in the tax regimes applicable to the different types of establishment."
"39. A difference in treatment between resident subsidiary companies according to the seat of their parent company constitutes an obstacle to the freedom of establishment if it makes it less attractive for companies established in other member states to exercise that freedom and they may, in consequence, refrain from acquiring, creating or maintaining a subsidiary in the state which adopts that measure (see Lankhorst-Hohorst GmbH v Finanzamt Steinfurt (Case C-324/00 )[2003] STC 607 ,[2002] ECR I-11779 , para 32 and the Test Claimants in the Thin Cap Group Litigation case (para 61)). 40. That conclusion cannot be called into question by the argument of the United Kingdom government that the parent company could have attained the objective pursued by creating a branch in Finland rather than a subsidiary. The second sentence of the first paragraph of art 43 EC expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another member state and that freedom of choice must not be limited by discriminatory tax provisions (see Commission v France (para 22) and CLT-UFA SA v Finanzamt Köln-West (Case C-253/03 )[2007] STC 1303 ,[2006] ECR I-1831 , para 14)."
"Article 56 EC does not preclude a bilateral tax convention…which does not provide that the Member State in which the shareholder resides is unconditionally obliged to prevent the resulting juridical double taxation."
"57. At this point it must be noted that the purpose and the system of the French legislation on 'tax integration' requires that certain intra-group transactions be neutralised before the consolidation of results. However, is there a direct link between the tax advantage of group taxation and the offsetting of that tax advantage by a tax deduction within the meaning of the case law of the Court of Justice? 58. In the Bachmann judgment, the Court of Justice found a direct link between the tax deductibility of insurance premiums and the taxation of sums payable by the insurers under insurance contracts. Since Mr Bachmann had concluded an insurance contract in Germany pursuant to which payments made by the insurers would not be subject to taxation in Belgium, the refusal of the Belgian tax authorities to allow the deduction of his premiums paid pursuant to the insurance contracts was justified. 59. In the cases decided so far, in which the coherence of the tax system was the decisive justification, the disadvantage in question was a compensatory levy, in other words a tax. In the present case the disadvantage lies in the neutralisation of certain intra-group transactions. In the strict sense, this cannot be viewed as the imposition of tax, because neutralisation measures do not constitute the levying of a tax. Nevertheless, they are to be seen as a tax disadvantage, because certain measures, namely the provision for the loss of share value, in contrast to the individual assessment of a company, are not taken into consideration. There is also a direct link between the provisions on neutralisation and the tax integration, because a consolidation of the results of the various companies will only be accorded if it can at the same time be assured that the objective pursued is not distorted by the use of losses more than once. 60. Thus, a measure, which seeks to avoid the use of losses more than once, may be justified in order to maintain the coherence of the tax system."
"51 Consequently, in refusing to extend the benefit of the tax integration regime to a resident parent company wishing to include its resident sub-subsidiaries in that regime where it holds those sub-subsidiaries through a non-resident subsidiary, the provisions of the CGI at issue in the main proceedings have the effect of ensuring the coherence of that regime."
"Relief shall not be given more than once in respect of the same amount, whether by giving group relief and by giving some other relief (in any accounting period) to the surrendering company, or by giving group relief more than once."
"42. … the United Kingdom and the other member states which submitted observations put forward three factors to justify the restriction. 43. First, in tax matters profits and losses are two sides of the same coin and must be treated symmetrically in the same tax system in order to protect a balanced allocation of the power to impose taxes between the different member states concerned. Second, if the losses were taken into consideration in the parent company's member state they might well be taken into account twice. Third, and last, if the losses were not taken into account in the member state in which the subsidiary is established there would be a risk of tax avoidance. 44. As regards the first justification, it must be borne in mind that the reduction in tax revenue cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is in principle contrary to a fundamental freedom (see, in particular, Proceedings brought by Manninen (Case C-319/02 ,[2004] STC 1444 , para 49 and the case law cited). 45. None the less, as the United Kingdom rightly observes, the preservation of the allocation of the power to impose taxes between member states might make it necessary to apply to the economic activities of companies established in one of those states only the tax rules of that state in respect of both profits and losses. 46. In effect, to give companies the option to have their losses taken into account in the member state in which they are established or in another member state would significantly jeopardise a balanced allocation of the power to impose taxes between member states, as the taxable basis would be increased in the first state and reduced in the second to the extent of the losses transferred. 47. As regards the second justification, relating to the danger that losses would be used twice, it must be accepted that member states must be able to prevent that from occurring. 48. Such a danger does in fact exist if group relief is extended to the losses of non-resident subsidiaries. It is avoided by a rule which precludes relief in respect of those losses. 49. As regards, last, the third justification, relating to the risk of tax avoidance, it must be accepted that the possibility of transferring the losses incurred by a non-resident company to a resident company entails the risk that within a group of companies losses will be transferred to companies established in the member states which apply the highest rates of taxation and in which the tax value of the losses is therefore the highest. 50. To exclude group relief for losses incurred by non-resident subsidiaries prevents such practices, which may be inspired by the realisation that the rates of taxation applied in the various member states vary significantly. 51. In the light of those three justifications, taken together, it must be observed that restrictive provisions such as those at issue in the main proceedings pursue legitimate objectives which are compatible with the Treaty and constitute overriding reasons in the public interest and that they are apt to ensure the attainment of those objectives."
"In each specific situation, it is necessary to consider whether the fact that a tax advantage is available solely to resident taxpayers is based on relevant objective elements apt to justify the difference in treatment."
"46. In the Marks & Spencer case the court recognised three grounds of justification ( éléments justificatifs ) and concluded from them— 'taken together … that restrictive provisions such as those at issue in the main proceedings pursue legitimate objectives which are compatible with the Treaty and constitute overriding reasons in the public interest and that they are apt to ensure the attainment of those objectives.' [19] 47. The three justifications it recognised were: —preservation of the allocation of the power to impose taxes between member states; —the danger that losses would be used twice; and —the risk of tax avoidance. 48. The formulation cited above already makes it clear that all three elements are closely linked to one another and cannot be viewed in isolation. In this connection preserving the allocation of the power to impose taxes is at the heart of these elements. 49. As already mentioned above, at the current stage of development of Community law power to impose direct taxes lies with the member states. [20] In the absence of harmonisation at Community law level it is likewise a matter for the member states to lay down criteria for allocating their powers to impose taxes by the conclusion of double taxation conventions or by unilateral measures. [21] 50. For the purposes of the allocation of powers of taxation, it is not unreasonable for the member states to find inspiration in international practice and the model conventions drawn up by the Organisation for Economic Cooperation and Development (OECD). [22] 51. By taxing resident companies on their worldwide profits and non-resident companies solely on the profits from their activities in that state, the parent company's member state is acting in accordance with the principle of territoriality enshrined in international tax law and recognised by Community law. [23] 52. In the Marks & Spencer case the court found that the allocation of power to impose taxes had been jeopardised as follows: '[T]o give companies the option to have their losses taken into account in the member state in which they are established or in another member state would significantly jeopardise a balanced allocation of the power to impose taxes between member states, as the taxable basis would be increased in the first state and reduced in the second to the extent of the losses transferred.' [24] 53. That finding applies mutatis mutandis to an extension of the rules in the Law on Intra-group Financial Transfers to cross-border transfers. It would likewise undermine the allocation of powers to impose taxes according to the principle of territoriality if taxpayers had a free choice as to the member state in which their profits should be taxed, by extracting a company's profits from its tax basis and adding them to the tax basis of a group company established in a different member state. 54. The second element of justification recognised in the Marks & Spencer case, namely preventing the danger that losses are used twice, is closely connected to the allocation of the power to impose taxes. 55. The allocation of power to impose taxes on the basis of elements of territoriality (an undertaking's residence or source of income within the territory) serves to confer on a state a primary right to tax certain income. This, taken together with the rules to prevent double taxation, creates an international system of tax competence. In principle, and even if not without lacunae in particular cases, this system is intended to ensure that all income is taxed, and taxed only once. [25] 56. If it were possible for losses to be set off against profits more than once, some profits would not be taxed at all, notwithstanding that in fact there were no corresponding deductible losses. This would infringe the principle of once-only taxation, which is fundamental to the international allocation of the power to impose taxes. 57. Recognising cross-border intra-group transfers could also lead to double non-taxation of income if the transfers could be deducted from the taxable profits of the transferor company notwithstanding that they were not taxable in the country in which the recipient company had its seat. 58. According to the observations submitted by the United Kingdom government, that might actually happen in the circumstances of the main proceedings. That is because under United Kingdom law intra-group transfers are not taxable income, and accordingly could not be taxed in the hands of the recipient company, AA Ltd, although that is disputed by Oy AA. 59. Irrespective of the actual treatment of intra-group transfers to British companies, it should be held that a rule which generally provides that only intra-group transfers between Finnish companies are deductible for tax purposes is, in theory, apt to prevent losses from being used twice. This is because so far as purely internal transfers are concerned the member state can ensure that the transfers are subject to tax. The further question remains to be considered as to whether the measure in this form goes no further than is necessary to achieve its purpose. [26] 60. The risk of tax avoidance as the third element of justification is also closely linked to the other two elements of justification. One might regard intra-group transfers to companies resident in member states in which such payments are not taxable in itself as tax avoidance. To that extent this justification may be considered together with the second justification. 61. Moreover, in the Marks & Spencer case the court regarded as tax avoidance the 'escape' by undertakings to the state in which losses had their highest value and thus gave the largest reduction in tax liability, by transferring losses from low taxation to high taxation jurisdictions. It is likewise to be regarded as tax avoidance in this sense for income to be deliberately transferred, by means of intra-group transfers, to companies resident in low taxation jurisdictions. 62. Strictly speaking, prevention of this form of 'tax avoidance' is not a separate ground of justification which can justify a restriction on freedom of establishment. The fact that undertakings seek to profit from the differences between national tax systems is a legitimate form of economic conduct, and is indeed inevitable in an internal market in which taxation of corporations is not harmonised. Accordingly, an undertaking cannot simply be prevented from moving its seat to another member state which offers more favourable conditions of taxation. [27] 63. Restrictions on the fundamental freedoms can be justified only if such 'tax optimisation' also undermines the allocation of powers to impose taxes between member states. 64. Recognising the allocation of powers to impose taxes according to the principle of territoriality as a ground of justification is not inconsistent with the principle that restrictions on the fundamental freedoms cannot be justified by reference to the purpose of preventing a reduction in tax revenue. [28] This principle means simply that fundamental freedoms cannot be restricted on account of purely fiscal considerations. By contrast, the present case concerns the fundamental interest of granting the member states a right at all to impose taxes according to the principle of territoriality. 65. In summary, it should be held that restricting the deductibility of intra-group transfers to transfers to Finnish companies is apt to safeguard the allocation of powers to impose taxes between member states, to exclude the possibility that income which is transferred is not taxed, and to combat tax avoidance. It ensures that profits earned by group companies in Finland are subject to taxation there according to the principle of territoriality."
"10. In that case the court prefaced its discussion of the three justifications by stating that, in order to ascertain whether restricting group relief to losses incurred by resident companies was justified, it was 'necessary to consider what the consequences would be if an advantage such as [group relief] were to be extended unconditionally'. [29] It was in that context that the court considered, and accepted (subject to two provisos reflecting the need for proportionality), the three justifications put forward by the United Kingdom and the other member states which had submitted observations. I see no reason for not adopting the same approach when assessing whether a measure limiting relief for losses incurred by a permanent establishment of a resident company to those losses incurred by its resident permanent establishments is compatible with the Treaty. From the point of view of the company, the ability to deduct losses of a foreign subsidiary by way of group relief is clearly analogous to the ability to deduct losses of a foreign permanent establishment. Indeed, the purpose of group relief is to avoid penalising companies which, rather than establishing branches, decide to expand their activities by setting up subsidiaries. [30] 11. Whether any or all [31] of the three justifications may apply in a given situation involving a permanent establishment rather than a subsidiary is a different issue. 12. With regard to the first justification, it seems to me that the preservation of the allocation of the power to impose taxes between member states might mean that the economic activities of the permanent establishment in one member state of a company established in another should be subject only to the tax rules of the first state in respect of both profits and losses. [32] The member state concerned in Marks & Spencer (the United Kingdom) did not assert taxing rights over foreign subsidiaries of resident companies. In the present case, the member state concerned would, in the absence of the DTC, have the right to tax a cross-border permanent establishment but has waived that right by exempting profits of such an establishment from tax. The effect is the same. As the court stated in Marks & Spencer , 'to give companies the option to have their losses taken into account in the member state in which they are established or in another member state would significantly jeopardise a balanced allocation of the power to impose taxes between member states, as the taxable basis would be increased in the first state and reduced in the second to the extent of the losses transferred'. [33] Similarly in the present case it would entail a breach of the symmetry between taxation and reliefs agreed by Germany and Luxembourg and reflected in the DTC if Germany were to grant relief for losses incurred by a Luxembourg permanent establishment of a German company where it had waived the right to tax profits made by such an establishment. 13. With regard to the second justification, the court in Marks & Spencer stated that member states must be able to prevent the danger that losses might be used twice, that that danger exists if group relief is extended to the losses of non-resident subsidiaries and that it is avoided by a rule which precludes relief in respect of those losses. [34] 14. Again, I do not see why that principle should not apply in a case such as the present. There is clearly scope for the same loss to be used twice. If anything that risk is greater in the context of losses made by a permanent establishment which remains in business than in the context (as in Marks & Spencer ) of losses made by subsidiaries which had been sold to third parties or ceased trading. In the former context, if the losses could be used in the member state where the company was resident there is a risk that they would be claimed again in the member state of the permanent establishment once the permanent establishment became profitable, without the member state where the company was resident being able to recoup the benefit obtained. Indeed it appears from the reply from the representative of Lidl to a question put by the Judge Rapporteur at the hearing in the present case that the loss which prompted the reference has now been set off against profits made in Luxembourg. [35] As the court stated in Marks & Spencer , member states must be able to tackle the risk that losses will be used twice, and that risk is avoided by a rule which precludes relief in respect of those losses. [36] 15. With regard to the third justification, relating to the risk of tax avoidance, the court stated in Marks & Spencer that the possibility of transferring the losses incurred by a non-resident company to a resident company entails the risk that within a group of companies losses will be transferred to companies established in the member states which apply the highest rates of taxation and in which the tax value of the losses is therefore the highest. In contrast to the situation concerning subsidiaries, where it is conceivable that the transfer of losses will be systematically organised within groups of companies and losses directed solely to companies of the group established in member states with higher rates of taxation, [37] in the case of permanent establishments there is clearly no scope for such 'jurisdiction shopping' if a company in one member state is allowed to deduct losses made by a permanent establishment in another member state. That is because, as the Commission submits, measures enabling the 'transfer' of losses from a permanent establishment, as opposed to a subsidiary, are neither necessary nor theoretically conceivable: losses made by a permanent establishment are losses of the taxpayer 'parent' company. Losses made by national permanent establishments can accordingly be directly and immediately deducted. The only difference between that domestic situation and the present case lies in the allocation of the power to impose taxes: if the permanent establishment is resident in another member state with which there is a double taxation convention such as that at issue in the present case, that state will have the exclusive right to tax the income of the permanent establishment in question. That does not affect the fact that a loss accrues to the taxpayer company, directly reducing its taxable income in its state of residence. The other state's right to tax simply creates a second connecting factor for the same loss and, therefore, the potential for double deduction. In cases such as the present, therefore, it seems to me that the third Marks & Spencer justification adds nothing to the first and second grounds. 16. I accordingly agree with, variously, Finland, France, Germany, Greece, the Netherlands, Sweden, the United Kingdom and the Commission that national legislation restricting the possibility for a company to deduct losses made by a permanent establishment in another member state may be justified by, first, the need to preserve the balanced allocation of the power to impose taxes between the different member states concerned and, second, the risk that losses might be taken into account twice. 17. The Bundesfinanzhof notes in the order for reference that it is uncertain whether the court intended the three justifications in Marks & Spencer to be cumulative, so that all three must be present. 18. Admittedly the court in Marks & Spencer referred to the 'three justifications, taken together', which supports that view. In N v Inspecteur van de Belastingdienst Oos/kantoor Almelo (Case C-470/04 )[2008] STC 436 ,[2006] ECR I-7409 , para 42, however, the court stated that 'preserving the allocation of the power to tax between member states is a legitimate objective' without reference to other grounds. In AA , the court accepted that legislation of a member state which precludes a subsidiary resident in that member state from deducting a financial transfer to its parent company from its taxable income unless that parent company is established in the same member state could in principle be justified on the basis of two of the three Marks & Spencer grounds, namely the first and the third. [38] And in Amurta the court, having stated that the second and third Marks & Spencer justifications had not been pleaded, none the less went on to consider (and reject) an argument based on the need to safeguard the balanced allocation between the member states of the power to tax. [39] It seems, therefore, that the three justifications do not necessarily all have to be applicable in a given case. In my view the legislation at issue in the present case could in principle be justified by reference to the first and second Marks & Spencer grounds, namely the objectives of preserving the balanced allocation of the power to impose taxes and of avoiding the danger that losses would be used twice."
"27. It is clear from the court's case law that a restriction on the freedom of establishment is permissible only if it is justified by overriding reasons in the public interest. It is further necessary, in such a case, that its application be appropriate to ensuring the attainment of the objective in question and not go beyond what is necessary to attain it (see Marks & Spencer plc v Halsey (Inspector of Taxes ) (Case C-446/03 )[2006] STC 237 ,[2005] ECR I-10837 , para 35; Cadbury Schweppes and Cadbury Schweppes Overseas (para 47); and Test Claimants in the Thin Cap Group Litigation (para 64)). 28. In that connection, the national court points out in particular that, in accordance with the provisions of the convention, the income generated by the permanent establishment in Luxembourg is not taxed in the member state of residence of the company to which it belongs. 29. In their observations to the court, the German, Greek, French, Netherlands, Finnish, Swedish and United Kingdom governments essentially submit that tax rules which, for the purposes of determining the tax base of a resident company, restrict the possibility for that company to deduct losses incurred by a permanent establishment belonging to it which is situated in another member state can, as a rule, be justified. 30. Those governments take the view that the justification for such rules in the light of Community law may be based, first, on the need to preserve the allocation of the power to impose taxes between the member states concerned and, secondly, on the need to prevent the danger that losses may be taken into account twice. 31. As regards the first of these justifications, it should be noted that the preservation of the allocation of the power to impose taxes between member states may make it necessary to apply to the economic activities of companies established in one of those states only the tax rules of that state in respect of both profits and losses (see Marks & Spencer (para 45), and Proceedings brought by Oy AA (Case C-231/05 )[2008] STC 991 ,[2007] ECR I-6373 , para 54). 32. To give companies the right to elect to have their losses taken into account in the member state in which they are established or in another member state would seriously undermine a balanced allocation of the power to impose taxes between the member states, since the tax base would be increased in the first state, and reduced in the second, by the amount of the losses surrendered (see Marks & Spencer (para 46), and Oy AA (para 55)). 33. With respect to the relevance of the first of these justifications in the light of the facts in the main proceedings, it should be pointed out that the member state in which the registered office of the company to which the permanent establishment belongs is situated would, in the absence of a double taxation convention, have the right to tax the profits generated by such an entity. Consequently, the objective of preserving the allocation of the power to impose taxes between the two member states concerned, which is reflected in the provisions of the convention, is capable of justifying the tax regime at issue in the main proceedings, since it safeguards symmetry between the right to tax profits and the right to deduct losses. 34. In circumstances such as those of the main proceedings, to accept that the losses of a non-resident permanent establishment might be deducted from the taxable income of the principal company would result in allowing that company to choose freely the member state in which those losses could be deducted (see, to that effect, Oy AA (para 56)). 35. As regards the second justification put forward in the observations submitted to the court, which is based on the danger that losses might be taken into account twice, the court has accepted that the member states must be able to prevent such a danger (see Marks & Spencer (para 47), and Rewe Zentralfinanz eG v Finanzamt Koln-Mitte (Case C-347/04 )[2008] STC 2785 ,[2007] ECR I-2647 , para 47). 36. In this connection, it must be pointed out that, in circumstances such as those which underlie the main proceedings, there is clearly a danger that the same losses will be used twice (see Marks & Spencer (para 48)). It is possible that a company might deduct, in the member state in which its seat is situated, losses incurred by a permanent establishment belonging to it and situated in another member state and that, despite such offsetting, the same losses might be taken into account subsequently in the member state in which the permanent establishment is situated, when that establishment generates profits, thereby preventing the member state in which the principal company has its seat from taxing that profit. 37. Consequently, the two justifications put forward must each be considered as being capable of justifying a restriction on the freedom of establishment arising from the tax treatment by the member state in which the seat of a company is located of losses incurred by a permanent establishment belonging to that company and situated in another member state. 38. The national court asks, however, whether the justifications set out in paras 44 to 50 of the judgment in Marks & Spencer , which also include the need to prevent the risk of tax avoidance, must be understood as being cumulative or whether the existence of only one of those factors is sufficient for the tax regime at issue in the main proceedings to be treated, in principle, as being justified. 39. It must be pointed out in that regard that, in para 51 of the judgment in Marks & Spencer , the court held that the three justifications taken together, which underlay the legislation at issue in the main proceedings, pursued legitimate objectives compatible with the Treaty and thus constituted overriding reasons in the public interest 40. However, bearing in mind the wide variety of situations in which a member state may put forward such reasons, it cannot be necessary for all the justifications referred to in para 51 of the Marks & Spencer judgment to be present in order for national tax rules which restrict the freedom of establishment laid down in art 43 EC to be capable, in principle, of being justified. 41. Thus, in the judgment in Oy AA , the court acknowledged in particular that the national tax legislation at issue could, in principle, be justified on the basis of two of the three justifications referred to in para 51 of the judgment in Marks & Spencer , namely the need to safeguard the allocation of the power to tax between the member states and the need to prevent tax avoidance, taken together (see Oy AA (para 60)). 42. Likewise, the tax regime at issue in the main proceedings can, in principle, be justified in the light of two of the factors referred to in para 51 of the judgment in Marks & Spencer , namely the need to safeguard the allocation of the power to tax between the member states and the need to prevent the danger that the same losses will be taken into account twice."
"24. The German government puts forward a number of legal arguments in support of the contested measure, based on considerations at once political (the need to ensure the balanced allocation of the power to impose taxes), ethical (the risk of tax evasion through losses being taken into account twice and the risk of tax avoidance), administrative (the need to ensure effective supervision), systemic (the need to ensure the uniformity of the tax system) and economic (the risk of budgetary losses). It claims to find support for these arguments in the judgment in Marks & Spencer[2006] STC 237 ,[2005] ECR I-10837 . The analysis of this reasoning should therefore begin with reference to that case law. 1. The balanced allocation of the power to impose taxes between member states 25. In the judgment in Marks & Spencer , the court (at para 46) accepted for the first time that the principle of the balanced allocation of the power to impose taxes between member states should be taken into account for the purpose of determining whether tax legislation is compatible with the fundamental freedoms. However, it was also careful to specify and delimit the conditions under which that principle applies. 26. In the first place, such a requirement is relevant only at the stage of justifying the restrictive measure at issue. It cannot be relied on, as the German government does in the present case, at the stage when a restriction on freedom of establishment is analysed. In the second place, the justification in question has a meaning, in the Community context, that calls for careful delimitation. 27. In this regard, the German government appears to acknowledge that that requirement could enable certain forms of discrimination to be excluded from the scope of the freedoms of movement. Its argument is based on a rule of symmetry between the right to tax a company's profits and the duty to take that company's losses into account. Since, in tax matters, profits and losses are two sides of the same coin, the German tax authorities should not have, when assessing the liability of a parent company resident in German territory to tax, to take account of losses incurred in connection with the activity of a subsidiary established in another member state, as they are not entitled to tax the profits of that subsidiary. Only such a rule on allocation would secure compliance with the sovereignty accorded to member states in matters of taxation and with the rules of international tax law. 28. This definition of the requirement of the balanced allocation of the power to impose taxes cannot be accepted. Considered in that light, it does not differ materially from a purely economic justification. Such an interpretation would enable a member state to refuse as a matter of course to grant a tax advantage to an undertaking on the ground that it had developed a cross-border economic activity which was unlikely to generate tax revenue in that state. Put in that form, such a justification was, moreover, expressly rejected by the court in the judgment in Marks & Spencer . The court held, with regard to that specific justification, that it must be borne in mind that the reduction in tax revenue cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is in principle contrary to a fundamental freedom. [40] 29. The principle that member states are free to determine the organisation of their tax system and to allocate their powers of taxation amongst themselves, must of course be taken into account. [41] However, it cannot be denied that the fundamental freedoms impose certain constraints on the member states in the exercise of their powers in this area. Those constraints essentially require compliance with the obligation not to place taxpayers exercising a cross-border activity at a disadvantage when compared with national taxpayers, even if to do so entails a loss of tax revenue for the state concerned. 30. This view was upheld by the court inter alia in the judgment in Bosal[2003] STC 1483 ,[2003] ECR I-9409 . In that case, the court held that the Treaty precludes a national provision which makes the deductibility of expenditure related to a Netherlands parent company's shareholding in a subsidiary established in another member state subject to the condition that such costs be indirectly instrumental in making profits which are taxable in the Netherlands. That view has been challenged on the ground that it is contrary to the principle of the fair allocation of the member states' power to impose taxes. As the expenditure incurred by the Netherlands parent company was economically connected with the profits made by its subsidiary established in another member state, it would have been legally more consistent to regard those costs as foreign expenditure that could be taken into account only in the state in which the profits were made. [42] However, such an analysis does not take sufficient account of the situation of a Community national operating in the wider context of the internal market. That situation must not be considered differently according to the territory in which the tax is imposed in each case; it must be assessed globally. From that point of view, it is clear that a difference in the taxation of parent companies according to whether or not they have foreign subsidiaries cannot be justified on the ground that they have transferred economic resources to a part of the territory of the European Union in which the state in question cannot exercise its power to impose taxes. To take any other view, in the absence of common rules on the subject, would be tantamount to depriving the fundamental freedoms enshrined in the Treaty of all practical effect. 31. Moreover, if the argument of symmetry advanced by the German government were to be accepted in the area of taxation, there is no apparent reason why it should not be extended to the other areas covered by the rules on the freedoms of movement. Just as the principle of the allocation of the power to impose taxes could be invoked, it would then be possible to rely generally on a principle of allocation of the power to legislate. On that principle, a member state would be entitled to refuse to take into account cross-border economic situations that might call into question its freedom to legislate. Thus, for example, goods lawfully produced in accordance with conditions imposed by another member state could be refused entry to a national market on the ground that the goods in question did not meet the legal conditions obtaining in that market. The free movement of goods would then be reduced to a purely formal rule of non-discrimination, consisting of according equal treatment only to goods subject to the rules of the state concerned. Such a result would be completely contrary to the settled case law of the court on the subject. [43] 32. That cannot therefore be the scope that should be accorded in the Community context to the legitimate requirement of a balanced allocation of the power to impose taxes. While the court accepted, in the judgment in Marks & Spencer[2006] STC 237 ,[2005] ECR I-10837 , a justification based on that requirement, it was only in relation to the risk of abuse or fraud that might arise, in certain cases, from inadequate co-ordination of the member states' powers to impose taxes. In the absence of harmonisation of tax legislation, there is reason to fear that the exercise of free movement might give rise to a veritable 'trade in losses' at Community level. As the court noted in that judgment (at para 46) 'to give companies the option to have their losses taken into account in the member state in which they are established or in another member state would significantly jeopardise a balanced allocation of the power to impose taxes between member states, as the taxable basis would be increased in the first state and reduced in the second to the extent of the losses transferred'. Economic operators would then be free to surrender their losses to companies established in member states with the highest rates of taxation, where the tax value of the losses would accordingly be greatest. Such a situation might call into question the neutrality which Community law is required to maintain with regard to national tax systems. [44] 33. In accordance with this principle of neutrality, the right of establishment may not be used by economic operators to gain advantages that are not connected with the exercise of the freedoms of movement. That would, however, be the case if a transfer of activity in the Community were determined solely by tax considerations, irrespective of any intention to seek real establishment and to integrate with the economy of the host society, with the sole aim of circumventing national laws or artificially exploiting differences between those laws. [45] Where a risk of abuse of this kind arises, it may be necessary, as the court held in Marks & Spencer[2006] STC 237 ,[2005] ECR I-10837 , para 45, to apply to the economic activities of companies established in one of those states only the tax rules of that state in respect of both profits and losses. That, in my view, is the true meaning of the requirement of the allocation of the power to impose taxes in the Community context. 34. It must also be shown that such a risk exists. That is why the court held, in the same judgment (at para 51), that the justification based on the preservation of the allocation of the power to impose taxes between member states cannot be separated from two other justifications relating, first, to the risk of losses being taken into account twice and, secondly, to the risk of tax avoidance. It is only in the light of these three justifications, 'taken together', that the court held that the restrictive provisions at issue could be justified. 35. It must therefore be determined whether, as the German government contends, there is a risk of losses being taken into account twice or a risk of tax avoidance in the present case. 2. The risk of losses being taken into account twice 36. The German government argues that, like the legislation at issue in Marks & Spencer , the legislation at issue is necessary to prevent a company benefiting from multiple tax advantages in the form of losses incurred abroad being taken into account twice. 37. That argument is irrelevant in the context of the present case. The losses at issue in this case are not, as in Marks & Spencer , losses incurred abroad by independent subsidiaries and subsequently surrendered against the profits of the parent company. They are losses incurred by the parent company as a result of a fall in the value of its shares in foreign subsidiaries. They are not to be confused with losses incurred by the subsidiaries themselves. These two kinds of losses are treated differently for tax purposes. It cannot therefore be held that there is a risk of the same losses being taken into account twice because a parent company is allowed to make such a deduction. 38. Even if it were to be accepted that there is an economic link between these two kinds of losses, as the German government contends, so that taking the losses of the subsidiaries and those of the parent company into account separately could be described as 'taking the losses into account twice', it does not appear that in the present case taking the losses into account twice would have a specific connection with a transfer of activity to another member state. The alleged 'double advantage' is not confined to companies with cross-border activities. The fact that a parent company with subsidiaries in Germany may offset write-downs to the book value of its shares in those subsidiaries against its taxable profits does not preclude the subsidiaries from taking their own losses into account for tax purposes in that state. There is consequently no connection between losses being taken into account twice and the allocation of the power to impose taxes between member states, and the fact that losses may be taken into account twice cannot justify a restriction on freedom of establishment."
"41. As the Advocate General stated at para 32 of his opinion, it is necessary to define the scope to be accorded to the legitimate requirement of the balanced allocation of the power to impose taxes between the member states. In particular, it must be noted that such a justification was accepted by the court in the judgment in Marks & Spencer only in conjunction with two other grounds, based on the taking into account of tax losses twice and on tax avoidance (see, to that effect, Marks & Spencer[2006] STC 237 ,[2005] ECR I-10837 , paras 43 and 51). 42. It must be acknowledged in that regard that there are courses of action which are capable of jeopardising the right of the member states to exercise their taxing powers in relation to activities carried on in their territory and thus of undermining a balanced allocation of the power to impose taxes between the member states (see Marks & Spencer , para 46) and which may justify a restriction on freedom of establishment (see Cadbury Schweppes[2006] STC 1908 ,[2007] Ch 30 , paras 55 and 56). The court has thus held that the fact of giving companies the right to elect to have their losses taken into account in the member state in which they are established or in another member state would seriously undermine a balanced allocation of the power to impose taxes between the member states, since the tax base would be increased in the first state, and reduced in the second, by the amount of the losses surrendered. 43. However, a difference in tax treatment between resident parent companies according to whether or not they have subsidiaries abroad cannot be justified merely by the fact that they have decided to carry on economic activities in another member state, in which the state concerned cannot exercise its taxing powers. Accordingly, an argument based on the balanced allocation of the power to impose taxes between the member states cannot in itself justify a member state systematically refusing to grant a tax advantage to a resident parent company, on the ground that that company has developed a cross-border economic activity which does not have the immediate result of generating tax revenues for that state."
"55. It follows that, in order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory. 56. Like the practices referred to in para 49 of Marks & Spencer , which involve arranging transfers of losses, within a group of companies, to companies established in the member states which apply the highest rates of taxation and in which the tax value of those losses is therefore the highest, the type of conduct described in the preceding paragraph is such as to undermine the right of the member states to exercise their tax jurisdiction in relation to the activities carried out in their territory and thus to jeopardise a balanced allocation between member states of the power to impose taxes (see Marks & Spencer , para 46)."
"In particular, there should be no more moderate means available to prevent the use of the loss more than once."
"55. In that regard, the court considers that the restrictive measure at issue in the main proceedings goes beyond what is necessary to attain the essential part of the objectives pursued where: —the non-resident subsidiary has exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods, if necessary by transferring those losses to a third party or by offsetting the losses against the profits made by the subsidiary in previous periods, and —there is no possibility for the foreign subsidiary's losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party. 56. Where, in one member state, the resident parent company demonstrates to the tax authorities that those conditions are fulfilled, it is contrary to arts 43 EC and 48 EC to preclude the possibility for the parent company to deduct from its taxable profits in that member state the losses incurred by its non-resident subsidiary."
"We consider that the answer is determined by the proper application of the no-possibilities test in accordance with the guidance given by Park J and the Court of Appeal. At one extreme if the company is still trading (or, as in Park J's example at [37], has ceased trading) but losses can still be carried forward, whether or not it is possible to use them depends entirely on the likelihood of making profits, so that none of the losses qualify. At the other extreme if, as happened here, the company is in liquidation and cannot start any new business but is holding some cash pending distribution which earns interest against which the losses can be set, we consider that one must split the losses into those that on the balance of probabilities can be set against the interest, and those that cannot. This is on the ground that the estimated income during the liquidation is one of 'the objective facts of the company's situation at the relevant time.' The no-possibilities test is applicable to the latter. The fact that the liquidator might make a profitable investment that used more of the losses is, we consider, in the fanciful category in circumstances in which the liquidator's duty is merely to pay the liabilities and distribute the assets."
"Marks & Spencer and the Commission contended that measures less restrictive than a general exclusion from group relief might be envisaged. By way of example, they referred to the possibility of making relief conditional upon the foreign subsidiary's having taken full advantage of the possibilities available in its member state of residence of having the losses taken into account. They also referred to the possibility that group relief might be made conditional on the subsequent profits of the non-resident subsidiary being incorporated in the taxable profits of the company which benefited from group relief up to an amount equal to the losses previously set off."
"45. Lidl Belgium and the Commission of the European Communities have referred in particular to the possibility that the right of a principal company to deduct the losses incurred by a permanent establishment belonging to it could be made subject to the condition that the company incorporate in its future profits the subsequent profits of the permanent establishment, to the extent of the losses previously offset. In that context, they refer to the system which operated in the Federal Republic of Germany prior to 1999. 46. It should be pointed out that reference was made in para 54 of the judgment in Marks & Spencer to the possibility of making the benefit of the tax advantage at issue subject to such a condition, together with the possibility of making the benefit of that advantage conditional upon the subsidiary established in a member state other than that in which the principal company has its seat having taken full advantage of the possibilities available in its member state of residence of having the losses taken into account. 47. In that regard, the court held in para 55 of the judgment in Marks & Spencer that a measure which restricts the freedom of establishment goes beyond what is necessary to attain the objectives pursued where a non-resident subsidiary has exhausted the possibilities for having the losses incurred in the member state where it is situated taken into account for the accounting period concerned and also for previous accounting periods and where there is no possibility for that subsidiary's losses to be taken into account in that state for future periods. 48. In para 56 of that judgment, the court also stated that where, in one member state, the resident parent company demonstrates to the national tax authorities that those conditions are fulfilled, it is contrary to art 43 EC to preclude the possibility for the parent company to deduct from its taxable profits in that member state the losses incurred by its non-resident subsidiary. 49. As regards the main proceedings, it must be pointed out that Luxembourg tax legislation provides for the possibility of deducting a taxpayer's losses in future tax years for the purposes of calculating the tax base. 50. As was confirmed at the hearing before the court, Lidl Belgium has in fact benefited from such an offsetting of the losses incurred by its permanent establishment in 1999 in a subsequent tax year, namely 2003, in which that entity generated profits. 51. Accordingly, Lidl Belgium has not shown that the conditions laid down in para 55 of the judgment in Marks & Spencer , for establishing the situation in which a measure constituting a restriction on the freedom of establishment for the purposes of art 43 EC goes beyond what is necessary to attain legitimate objectives recognised by Community law, were satisfied."
"Article 43 EC does not preclude a situation in which a company established in a member state cannot deduct from its tax base losses relating to a permanent establishment belonging to it and situated in another member state, to the extent that, by virtue of a double taxation convention, the income of that establishment is taxed in the latter member state where those losses can be taken into account in the taxation of the income of that permanent establishment in future accounting periods."