BN 08: Extension to Group Relief
Who is likely to be affected?
1. The new relief will be available to UK groups with foreign subsidiaries
that have incurred foreign tax losses that cannot be relieved elsewhere
where those subsidiaries are either resident in the European Economic Area
(EEA) or have incurred the relevant losses in a permanent establishment
in the EEA.
General description of the measure
2. This measure introduces a small extension to the group loss relief rules to reflect European Community law. It will include provisions to prevent abuse.
Operative date
3. The legislation preventing abuse will be effective from 20 February 2006. All other legislation will be effective from 1 April 2006.
Current law and proposed revisions
4. Under Section 402 Income and Corporation Taxes Act 1988, a group company can claim to set the losses of another group company against its profits, thereby reducing the amount of corporation tax it pays. However, this applies only if both the claimant company and the surrendering company are UK resident or carrying on a trade in the UK through a permanent establishment.
5. On 13 December 2005 the Court of Justice of the European Communities (CJEC) handed down its decision in the case of Marks & Spencer plc v. Halsey. This case concerned the UK’s group loss relief rules for companies.
6. In summary, the Court ruled that the UK’s group loss relief rules
are in principle compatible with European law, but go too far in denyi ng
loss relief to a parent company for the losses of a foreign subsidiary where
the parent company has demonstrated that the non-resident subsidiary has
exhausted all possibilities of relief in its state of residence.
7. Primary legislation is being introduced to ensure compatibility with
European Community law. The legislation will not affect the existing group
loss relief rules as they apply between UK companies or UK permanent establishments.
The new relief will apply only where a UK parent
company has a foreign subsidiary (including an indirectly held subsidiary)
which has incurred a foreign tax loss that is unrelievable in the home state
(or elsewhere), and where that subsidiary is either resident in the EEA
or has incurred the relevant losses in a permanent establishment in the
EEA.
8. The foreign losses will be ‘relievable in the UK’ only
where all possibilities of relief have been exhausted and future relief
is unavailable in the country where they were incurred or in any other country.
Where there is a foreign company in the ownership chain between the surrendering
company and a UK parent, precedence rules will be used to determine whether
relief will
be available in the UK.
9. In order to obtain relief against UK profits the foreign tax loss will
need to be recomputed under UK tax principles. This means that relief will
only be available for losses or other amounts that may be surrendered under
the existing UK rules. In addition, when calculating the amount of the relief,
regard will be had to the overall amount of the unrelieved foreign loss.
That is, relief will not be given for an amount that does not represent
an unrelieved foreign tax loss.
10. All appropriate compliance obligations will be placed on the UK claimant company. Therefore, the claimant company will be responsible for demonstrating that the losses meet the relevant conditions.
11. Legislation will also be introduced, effective from 20 February 2006, to deny loss relief where there are arrangements which either result in losses becoming unrelievable outside the UK that might otherwise be relievable, or give rise to unrelievable losses which would not have arisen but for the availability of relief in the UK, if the main purpose or one of the main purposes of those arrangements is to obtain UK relief.
Further advice
12. If you have any questions about this change, please contact Robert Jordan on 020 7147 2622. Information about Budget measures is now available.
