Tax Treatment of Losses in the European Union - possibilities and challanges

Sammanfattning: The European Union today consists of 25 Member States. The Member States all have different tax systems and different rates of taxation. A few Council Directives have been adopted in order to harmonize direct taxation between the Member States, but none regarding cross-border losses. Losses are negative profits, they do not give rise to the levy of taxes but they may reduce the tax burden that would have been imposed on positive income. So the tax treatment of losses can prove to be of great significance for companies wishing to make expansions, either domestically or abroad. There is currently an increase in tax competition between states. This means that states lower their taxes to attract capital and establishments from foreign investors. The investments create job opportunities as well as economic growth in these countries. Within the EU, tax competition between the 25 Member States is possible as long as neither the tax rates nor bases are harmonized. The treatment of losses for groups of companies in most European countries today provide for a different taxation depending on if a group has undertakings domestically or abroad. If a group has domestic subsidiaries, their losses can be taken into consideration by the other companies within the same group. If a loss is incurred in a foreign subsidiary, many European countries are reluctant to let these losses be taken into consideration within their own jurisdiction. In recent case law developed by the ECJ there are arguments pointing to that such national legislation, that provides different tax treatment for foreign and domestic losses, can constitute an infringement of the EC Treaty. This infringement can consist of either indirect discrimination or a restriction of the freedom of establishment conferred on all Community nationals. The pending Marks and Spencer case before the ECJ is regarding the tax treatment provided for losses suffered in foreign subsidiaries. The UK group relief system is only applicable to UK parent companies with subsidiaries established domestically, or carrying out economic activity within the UK. Seven Member States intervened in this case, allegedly, because the tax treatment carried out by the UK is similar to the way most European countries are dealing with losses incurred in foreign subsidiaries. The Member States expressed at the hearing in February their fear of loosing tax revenue if they must give the same treatment to foreign as to domestically suffered losses. The Advocate General Poiares Maduro recently delivered his Opinion regarding the M&&semicS case. His view is that the UK legislation contains a clear restriction on the freedom of establishment. However, the AG has expressed his concern that a completely open system could give rise to the use of the same losses twice, which would be contrary to the EC Treaty objectives. Therefore, AG Maduro has suggested that national provisions, which exclude foreign losses afforded equivalent tax treatment within the suffering company's home jurisdiction, may be justified under the ground of fiscal coherence. The solution provided by AG Maduro is contrary to the ECJ case law as it stands at present. The justification ground of fiscal coherence, has always been rejected by the ECJ, when the advantage and the tax levied does not affect the same taxpayer. Moreover, according to the author, the solution provided by AG Maduro can still entail further restrictions. The judgment of the ECJ is expected at the end of the year and has been anticipated by scholars, because of the impact it may cause on different Member States national legislation. Many are expecting the outcome to be similar to the proposal of the AG Maduro. Hopefully, this judgment will be clear in what treatment needs to be provided for foreign losses as compared to domestic in order not to infringe any of the articles in the Treaty. Moreover, it will be clear in what grounds if any can justify a differentiated treatment of foreign and domestically suffered losses.