European court says no! no! no! on Bosal

Last Thursday, the court marched on with a favourable decision for the taxpayer in the Dutch case of Bosal Holdings BV.

The court held that it was unlawful to disallow for tax purposes the costs associated with an overseas investment – for example, interest on loan finance – while they were allowed when associated with a domestic investment.

The Dutch tax authority, supported by the UK, rolled out the usual arguments in their defence. The measure was not discriminatory; even if it was, it was justified as necessary to protect the cohesion of the Dutch tax system; and it was also necessary to prevent an erosion of the Dutch tax base. And the ECJ, as usual, said no! no! no! to these defences.

From the practitioner’s perspective the case is interesting for at least two reasons. First, it makes clear that domestic law, which is implemented in accordance with a European Union directive (in this case the parent/subsidiary directive), must nevertheless comply with the basic freedoms in the EC treaty. Secondly, it is probably the strongest statement yet that a parent company should not be treated differently (or less favourably) because it invests in another EU country rather than a domestic subsidiary.

The case is particularly relevant to a number of UK claims. First, it is now difficult to see how the Inland Revenue can continue to tax dividends from EU companies given that dividends from UK companies are exempt.

Secondly, the case provides assistance for claiming group relief for overseas losses in the UK. In the M&S case, the special commissioners relied heavily on the so-called principle of territoriality to find against the taxpayer. If the foreign subsidiary is not subject to UK tax on its profits, its losses should not be relieved in the UK, it argued.

Bosal makes it clear the subsidiary’s position is irrelevant. One must look at the parent company and if it receives relief for an investment in a loss-making UK subsidiary, the same relief should be available for an investment in a loss-making overseas subsidiary.

The case will also cheer those companies that are currently establishing a group litigation order in the High Court for the recovery of surplus ACT.

The ACT regime (abolished in 1999) clearly hindered cross-border investment.

It is estimated that there may be up to £7bn of surplus ACT waiting to be reclaimed.

Finally, the case may help in challenging the controlled foreign company legislation. For example, a UK parent with a shared services centre in Ireland is objectively in the same position as a UK parent with a shared services centre in Glasgow. Why should the first be subject to the CFC rules but not the second?

It would be nice to see the Revenue accept that some of these rules now have to change. But, unfortunately, we will probably see it again appearing in front of the ECJ to repeat the usual defences; and the ECJ will again reply no! no! no!

Chris Morgan is partner in charge of KPMG EU tax group ( UK COURT CASES The UK government is virtually under siege from big companies attempting to recover tax they claim was unjustly paid. At the end of March this year, the High Court gave the go-ahead for a group litigation order that would allow lawyers acting on behalf of 30 companies to pursue the Inland Revenue for overpaid taxes amounting to £750m. They claim that companies should be allowed to offset losses made by European subsidiaries against UK-earned profits.

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