Neutral Citation Number: [2003] EWHC 1945 (Ch)
Case No. CH/2003/APP/O181
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Date: Friday 2 May 2003
BEFORE:
THE HONOURABLE MR JUSTICE PARK
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BETWEEN:
MARKS & SPENCER PLC
Appellant
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DAVID HALSEY (HM Inspector of Taxes)
Respondent
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UPON the parties having agreed facts in accordance with the statement attached to this order
AND UPON HEARING leading counsel for the appellants and respondents
AND UPON READING the documents recorded on the court file as having been read
AND UPON the court finding that a preliminary ruling of the European Court of Justice concerning the interpretation of the Treaty Establishing the European Community (“the EC Treaty”) is necessary to enable it to give judgment
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ORDER
IT IS HEREBY ORDERED:
1. that the questions set out in the schedule to this order be referred to the European Court of Justice for a preliminary ruling pursuant to Article 234 of the EC Treaty;
2. further proceedings be stayed pending that preliminary ruling;
costs be reserved.
SCHEDULE
REFERRAL TO COURT OF JUSTICE
After hearing counsel for the appellant and the respondent the court considers that, in order to determine the dispute, it is necessary to seek a preliminary ruling from the Court of Justice under Article 234 of the EC Treaty on the following questions:
1. In circumstances where:
• provisions of a member state, such as the UK provisions on group relief, prevent a parent company which is resident for tax purposes in that state from reducing its taxable profits in that state by setting off losses incurred in other member states by subsidiary companies which are resident for tax purposes in those states, where such set off would be possible if the losses were incurred by subsidiary companies resident in the state of the parent company;
• the member state of the parent company:
subjects a company resident within its territory to corporation tax on its total profits, including the profits of branches in other member states, with arrangements for the availability of double taxation relief for those taxes incurred in another member state and under which branch losses are taken account of in those taxable profits;
does not subject the undistributed profits of subsidiaries resident in other member states to corporation tax;
subjects the parent company to corporation tax on any distributions to it by way of dividend by the subsidiaries resident in other member states while not subjecting the parent company to corporation tax on distributions by way of dividend by subsidiary companies resident in the state of the parent;
grants double taxation relief to the parent company by way of a credit in respect of withholding tax on dividends and foreign taxes paid on the profits in respect of which dividends are paid by subsidiary companies resident in other member states;
is there a restriction under Article 43 EC, in conjunction with Article 48 EC? If so, is it justified under Community law?
2. (a) What difference, if any, does it make to the answer to question 1 that, depending on the law of the member state of the subsidiary, it is or may be possible in certain circumstances to obtain relief for some or all of the losses incurred by the subsidiary against taxable profits in the state of the subsidiary?
(b) If it does make a difference, what significance, if any, is to be attached to the fact that:
• a subsidiary resident in another member state has now ceased trading and, although there is provision for loss relief subject to certain conditions in that state, there is no evidence that in the circumstances such relief was obtained;
• a subsidiary resident in another member state has been sold to a third party and, although there is provision under the law of that state for the losses to be used under certain conditions by a third party purchaser, it is uncertain whether they were so used in the circumstances of the case;
• the arrangements under which the member state of the parent company takes account of the losses of UK resident companies apply regardless of whether the losses are also relieved in another member state?
(c) Would it make any difference if there were evidence that relief had been obtained for the losses in the member state in which the subsidiary was resident and, if so, would it matter that the relief was obtained subsequently by an unrelated group of companies to which the subsidiary was sold?
Note
A background note which has been agreed between the parties to the case and which explains the particular circumstances which have given rise to this reference is annexed hereto.
ANNEX
A BACKGROUND
Reference is made to the Court of Justice for a preliminary ruling in the course of an appeal by Marks & Spencer PLC against a decision of the Special Commissioners, the first-instance tax tribunal in the United Kingdom. The issue before the Special Commissioners was whether the UK group relief provisions were in breach of Articles 43 and 48 of the EC Treaty in so far as they prevented a subsidiary resident and trading in another member state from surrendering losses to its ultimate UK parent company (or another member of the UK group). In their decision the Special Commissioners found against Marks & Spencer PLC, who appealed to this Court.
B REPRESENTATION
Marks & Spencer PLC are represented by Graham Aaronson QC and Paul Farmer, counsel, instructed by Dorsey & Whitney of 21 Wilson Street, London EC2M 2TD, telephone: 020 7588 0800, fax: 020 7588 0555, reference Simon Whitehead/Alison Last.
David Halsey (HM Inspector of Taxes) is represented by Dr Richard Plender QC and David Ewart, counsel, instructed by the Solicitor of Inland Revenue of Somerset House, Strand, London WC2R 1LB, telephone: 020 7438 7956, fax: 020 7438 6246, reference Nora O’Flaherty.
C THE RELEVANT UK TAX LEGISLATION
The following excerpt from the Special Commissioners’ decision (pages 4-7, paragraphs 9-20) provides an account of the relevant UK legislation.
“Liability to UK corporation tax 1
9. Corporation tax is charged on the profits of companies that are either resident in the United Kingdom or conduct trading activities in the United Kingdom through a branch or agency (s 6(1), 11(1)). A resident company, such as the appellant, is charged to corporation tax in respect of its worldwide profits (s 8(1)). A non-resident company is charged to corporation tax only in respect of the profits attributable to its UK branch or agency (s 11(1)). In the case of the foreign subsidiaries, the United Kingdom has entered into bilateral double taxation conventions with each of France, Belgium and Germany. Accordingly, the foreign subsidiaries as non-resident companies are only within the scope of UK corporation tax in respect of their trading activities if those activities are conducted in the United Kingdom through a permanent establishment within the treaty definition. As we noted in paragraph 5 above, none of the foreign subsidiaries was resident or maintained a permanent establishment in the United Kingdom or otherwise conducted its
1 References throughout this decision to statutory provisions are to the provisions of the Income and Corporation Taxes Act 1988, unless otherwise stated.
trading activities there. They were accordingly outside the scope of the UK corporation tax.
10. The appellant, however, as a UK resident company, is subject to corporation tax on its worldwide profits. Unlike many European countries, the United Kingdom adopts a tax credit system of relieving double taxation. It is not the United Kingdom’s policy to exempt UK residents from tax (whether through domestic provision or by agreement under a treaty) in respect of their foreign profits. The principle that underlies this system is capital export neutrality, ie that the appellant’s profits should be taxed in the same way whether it earns its profits in the United Kingdom or abroad. Thus, the appellant must bring its foreign profits into charge to UK tax. It is then entitled to credit any foreign tax suffered on those profits against its liability to UK tax on the same profits. (Alternatively, the foreign tax may be deducted in computing profits if that would be more beneficial, for example if as a result of UK losses there is no UK tax liability against which to credit the foreign tax).
11. There are two aspects of this system that are relevant to our decision. First, if the appellant (or any of its UK subsidiaries) were to conduct trading activities in any of France, Belgium or Germany through a branch in those countries, the United Kingdom would tax the profits attributable to that establishment and credit any foreign tax against the UK tax on the branch profits (or allow the foreign tax to be deducted in calculating branch profits or losses for UK tax purposes). The branch trading profits would be calculated on UK tax principles. If a trading loss arose that loss could be set against the appellant’s profits. Any unrelieved loss would be carried forward. The fact that the loss may also be relieved in the foreign jurisdiction against the branch’s future profits does not affect the relief against UK profits.
12. Secondly, if the appellant chooses (as it did) to establish in France, Belgium and Germany through foreign (non-resident) rather than UK subsidiaries, any dividends paid to the appellant (or in this case MSIH) by those foreign subsidiaries are taken into account as part of its profits in the year of receipt. With a foreign subsidiary (instead of a branch), a UK resident parent company is not taxed on the profits of the foreign subsidiary as they arise, nor is relief given for any losses. The only exception to that rule is where the UK’s controlled foreign company legislation applies, in which case the income of the foreign subsidiary is attributed to the UK parent and taxed with relief for foreign tax paid by the subsidiary. Consistently with the treatment of foreign income generally, if and when the foreign subsidiary pays a dividend to its UK parent that dividend is taxed but credit is given for the foreign tax both on the profits out of which the dividend is paid and any withholding tax (although the Parent-Subsidiary Directive² now prevents any such withholding tax being levied on dividends from subsidiaries established in the member states).
² Council Directive of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states (90/435/EEC).
13. In summary, where a company such as the appellant establishes itself abroad through a subsidiary as compared with a foreign branch, worldwide income is taxed with relief for foreign tax but with the difference that for a subsidiary such taxation is charged only as, when, and to the extent to which, dividends are paid to the United Kingdom. There is no specific relief for losses of foreign subsidiaries, although these may have the indirect effect of reducing the amount of dividends paid and therefore taxed in the hands of the parent company. For the years in question, gains and losses on the sale or other disposal of shares in a foreign subsidiary, as well as distributions on a winding up, were taxed or relieved as capital gains or allowable capital losses (rather than as income), for which there are separate computation rules.
14. If we compare the treatment of dividends from foreign subsidiaries with dividends from UK resident subsidiaries, the receipt of dividends from the latter are not taxed (s 208). While this treatment is different to that accorded to foreign dividends, it is consistent with the principle that the resident subsidiary’s profits (including its foreign income and gains) are assumed to have been brought into charge to tax in the United Kingdom.
Group relief for losses
15. Within a group of UK resident companies a system of “group relief” allows companies within the same accounting period to offset profits and losses arising to different group companies. As a result the loss-making company no longer has the loss available to carry forward, and will accordingly pay tax on future profits sooner, and the profitable company pays tax later since the loss surrendered to it reduces its profits.
16. In relation to accounting periods both ending before and ending on or after 15 April 2000, section 402 provides:
“(1) Subject to and in accordance with this Chapter and section 492(8), relief for trading losses and other amounts eligible for relief from corporation tax may, in the cases set out in subsections (2) and (3) below, be surrendered by a surrendering company (“the surrendering company”) and, on the making of a claim by another company (“the claimant company”) may be allowed to the claimant company by way of relief from corporation tax called group relief.
(2) Group relief shall be available in a case where the surrendering company and the claimant company are both members of the same group...”
Section 403 provides that—
“(1) If in an accounting period (the “surrender period”) the surrendering company has—
(a) trading losses. . .
the amount may, subject to the provisions of this Chapter, be set off for the purposes of corporation tax against the total profits of the claimant company for its corresponding accounting period.”
18. In relation to the appellant’s claims for group relief for its accounting periods ended 31 March 1998, 1999 and 2000, section 413(5) provided as follows:
“References in this chapter to a company apply only to bodies corporate resident in the United Kingdom ...”
From the year 2000, as a change in the law following the European Court’s decision in Case C264/96, Imperial Chemical Industries plc v Colmer [1998] ECR I-4695 (ICI), which dealt with the related consortium relief, group relief is restricted to profits and losses within the scope of UK taxation. This allows a UK branch of a non-resident company to surrender its losses to another group company for offset against its UK taxable profits (or to claim a surrender of losses from another group company for offset against its UK branch profits).
19. Thus, in relation to the appellant’s claim for group relief for its accounting period ended 31 March 2001, section 402 provided:
“(3A) Group relief is not available unless the following condition is satisfied in the case of both the surrendering company and the claimant company.
(3B) The condition is that the company is resident in the United Kingdom or is a non-resident company carrying on trade in the United Kingdom through a branch or agency.”
In addition, section 403D(l) provides that no amount is available for surrender by way of group relief by a non-resident company except in so far as:
“(a) it is attributable to activities of that company the income and gains from which for that period are, or (were there any) would be, brought into account in computing the company’s chargeable profits for that period for corporation tax purposes.”
For the purposes of this case, the Inspector of Taxes concedes that the same relief as is given for periods beginning on or after 1 April 2000 is available by virtue of European law for earlier periods.
20. A claimant company will usually pay the surrendering company for the losses. Such payments, known as “payments for group relief”, are ignored for tax purposes up to the amount of the surrendered loss (s 402(6)).”
D AGREED STATEMENT OF FACTS
The facts as agreed by the parties are as follows.
1. Background to the appellant
Marks and Spencer plc (“the appellant”) was incorporated and registered in England and Wales on 17 June 1926 as a company with registered number 214436. Its registered office is Michael House, Baker Street, London W1U 8EP.
The appellant is the principal trading company and holding company for a number of UK and overseas companies. In the UK the appellant is a leading general retailer, selling clothing, food, homeware and financial services. The accounts and annual review for the appellant for the years ended 31 March 2001 and 2002 are available upon request.
The appellant is resident in the UK for tax purposes. It is not a dual resident company. Its tax affairs are dealt with at Peterborough Large Business Office (Corporation Tax), Stuart House, St John’s St, Peterborough PE1 1RJ under reference 549/96420 31360. At the time of the original claims, its tax affairs were dealt with at Bristol Large Business Office, Inter City House, Mitchell Lane, Bristol BS1 6DQ under reference GJB/96420 31360.
2. Background to Overseas Expansion
In order to become recognised as an international retailer, the appellant began to move into overseas jurisdictions in 1975 with the opening of the Boulevard Haussmann store in Paris. By the end of the 1990s it was operational in over 600 locations in more than 36 countries, through wholly owned subsidiaries and third party franchises. As well as Continental Europe, the appellant has or had a presence in the US, Canada and Hong Kong. Despite this international outlook, the UK continued to account for over 80 per cent of total sales.
Most of the overseas operations were ultimately owned via a Dutch holding company. Once a decision had been made to establish the subsidiaries in Continental Europe consideration was then given to which location would be suitable as a holding company. In common with many international groups, a decision was taken to establish a Dutch holding company to in order, amongst other things, to facilitate effective dividend repatriation were the subsidiaries, as hoped, to be profitable.
In Continental Europe, performance was variable but a trend developed towards rising losses in the second half of the 1990s. These arose from lack of clarity in market position, over-footaged stores and too few products appealing to a broad customer base. Stores were concentrated in high cost prime city sites which became increasingly marginalised through the increase in edge of town developments. The well-publicised factors which impacted the UK business at this time relating to sourcing, values and margins were exacerbated by the consistent strength of sterling.
On 29 March 2001 the appellant announced its intention to divest itself of its Continental European activity. By 31 December 2001 the French and Spanish subsidiaries had been sold to third parties, and trading operations had been discontinued in the remainder of the subsidiaries, including the German and Belgian companies which are now essentially dormant.
3. Summary of Claims
The appellant has made group relief claims in respect of losses incurred by certain of its EU subsidiaries for the four accounting periods ended 31 March 1998, 1999, 2000 and 2001 pursuant to paragraph 6 of Schedule 17A ICTA 1988. (The claims which were made in respect of the Spanish subsidiary were subsequently withdrawn.)
The amounts of the losses, which are relevant to the claim, are:
Year ended 31 March 1998
Germany - £4,360,327 loss
Year ended 31 March 1999
Germany - £19,996,358 loss
France - £11,743,059 loss
Year ended 31 March 2000
Germany - £12,924,763 loss
France - £15,272,142 loss
Belgium -£1,942,188 loss
Year ended 31 March 2001
Germany - £9,127,919 loss
France - £20,126,353 loss
Belgium - £3,692,992 loss
“Germany” refers to Marks and Spencer (Deutschland) GmbH, described further in paragraph 5 below. “France” refers to Marks and Spencer (France) SA, described further in paragraph 6 below. “Belgium” refers to SA Marks and Spencer (Belgium) NV, described further in paragraph 7 below.
4. Group Structure
Extracts from the group structure chart are enclosed as Attachments Al and A2, showing the relationships between the relevant companies.
Marks and Spencer (Nederland) BV (“BV”) is a corporation organised under Dutch law, having its registered office at Koningslaan 34, 1075 AD, Amsterdam, the Netherlands. It was incorporated on 22 August 1958. It is resident in the Netherlands for tax purposes. It is not a dual resident company. Its taxation affairs are dealt with at Kingstordweg 1, 1043 GN, Amsterdam, the Netherlands under reference number 14.bg.034.
BV is a holding company for certain of the appellant’s overseas subsidiaries including Marks and Spencer (Deutschland) GmbH (“MSG”), SA Marks and Spencer (Belgium) NV (“MSB”) and (until 31 December 2001) Marks and Spencer (France) SA (“MSF”).
Marks and Spencer International Holdings Limited (“MSIH”) is a UK incorporated company resident in the UK for tax purposes. It is not a dual resident company. It is an investment holding company owning certain shares in the appellant’s non-UK subsidiaries, including 100 per cent of BV.
In summary, the appellant owns 100 per cent of MSIH which in turn owns 100 per cent of BV. At the time the losses were incurred, BV owned 100 per cent of MSF and MSB and, for the 1998 and 1999 years, 100 per cent of MSG. For the 2000 and 2001 years (and currently), MSG was and is owned 67 per cent by BV and 33 per cent by MSIH. BV still owns 100 per cent of MSB. MSF was sold in December 2001.
5. Germany
MSG is a corporation organised under German law, having its registered office at Antoniterstrasse 17, 50667 Cologne, Germany. The first store (in Cologne) opened in October 1996. MSG is resident in Germany for tax purposes. It is not a dual resident company. Its taxation affairs are dealt with at Finanzamt Köln-Mitte, under reference number St Nr 215/0188/3056.
MSG operated four retail stores in Germany for clothing, foods, home furnishings, furniture, gifts, accessories, toiletries and cosmetics and various other products under the name “Marks and Spencer”. The number of employees (excluding head office functions) exceeded 160. The company ceased trading by 31 December 2001.
6. France
MSF was a corporation organised under French law, having its registered office at this time at 6 8 rue des Mauthurins, BP 252-09, 75424 Paris, Cedex 09, France. It was incorporated on 1 February 1958 and became part of the M&S Group in 1975 with the opening of the flagship Boulevard Haussmann store in Paris on 25 February 1975. MSF was resident in France for tax purposes. It was not a dual resident company. Its taxation affairs were dealt with at 44/48 Chaussée d’Antin, 75441 Paris, Cedex 09. BV sold the shares in MSF to a third party Galeries Lafayette on 31 December 2001.
MSF operated 18 retail stores in France for clothing, foods, home furnishings, furniture, gifts, accessories, toiletries and cosmetics and various other products under the name “Marks and Spencer”. The number of employees (excluding head office functions) exceeded 1,200.
7. Belgium
MSB was a corporation organised under Belgian law, having its registered office at this time at Rue D’Argent 10/20, B-l000 Bruxelles, Belgium. MSB is resident in Belgium for tax purposes. It is not a dual resident company. Its taxation affairs are dealt with at Ministère des finances, Administration des Contributions Directes, Contrôle Bruxelles 4 Sociétés, Rue des Palais.
MSB operated four retail stores in Belgium for clothing, foods, home furnishings, furniture, gifts, accessories, toiletries and cosmetics and various other products under the name “Marks and Spencer”. The number of employees (excluding head office functions) exceeded 200. The company ceased trading by 31 December 2001.
8. Running of the Overseas Operations
All of the local activities were managed and controlled by the directors in the respective jurisdictions. There is no dispute between the appellant and the respondent that the companies were not resident in the UK in the relevant years.
Goods and services were supplied from the appellant on an arm’s length basis, for the years concerned in these appeals. While local management could specify the lines likely to be more or less attractive to local markets, the principal M&S lines were designed, selected, commissioned and purchased in the UK. The supply of goods was regulated by agreement between the parties. Certain corporate services such as Treasury and Information Technology were co-ordinated from the UK and supplied to the subsidiaries under a service agreement between the parties.
The stores were run in the same manner as the UK Retail business and had identical characteristics. The stores were in prime retail locations such as city centres and out-of-town malls and were typically large format stores with large retail selling areas, ranging from 1,675 to 16,100 square metres. All stores included offices, storage facilities and staff canteen/changing space.
9. Group Relief Claims
The claims are in respect of MSG for the four years ended 31 March 2001, for MSF for the three years ended 31 March 2000, and for MSB for the two years ended 31 March 2001. Group relief claims were made by the appellant to the UK respondent on 31 March 2000 (for 1998), 30 March 2001 (for 1999), and 24 September 2001 (for 2000 and 2001). The respondent rejected the claim by way of decision dated 13 August 2001 (for 1998 and 1999) and 2 November 2001 (for 2000 and 2001). The appellant appealed the respondent’s refusal of the claim by way of letter dated 20 August 2001 (for 1998 and 1999) and elected under section 46(1) of the Taxes Management Act 1970 that the case be heard by the Special Commissioners. Subsequently the appellant and respondent on 31 July 2002 made a joint referral under Para 3 1A(1) Part IV Schedule 18 FA 98 to add the 2000 and 2001 appeals to the hearing, which was agreed by the Special Commissioner on 10 September 2002.
The appellant and respondent both agree that the losses must be computed on a UK tax basis. At the respondent’s request, the appellant recomputed the losses on this basis. By way of letter dated 25 March 2002 the respondent indicated that it was prepared to accept the revised figures, which are consequently in the sums listed in paragraph 3 above. The appellant and respondent both agree that, if the claims succeed, the losses as computed will be available as group relief to the appellant (it has been specifically agreed that the losses of the subsidiaries will not be excluded from group relief by reason of the exclusion of losses of foreign trades falling within Case V of Schedule D, contained in ICTA 1988, section 403(2) later section 403ZA(2)(a)).
The appellant has sufficient tax capacity to absorb the losses claimed as its UK taxable profits in the relevant years are currently estimated to be:
Y.E. 31/3/98 - £958,551,573
Y.E. 31/3/99 - £451,052,043
Y.E. 31/3/00 - £417,103,539
Y.E. 31/3/01 - £407,554,815
Because of the termination of the German and Belgian trading operations, and the sale of the French company, the losses have not been used, and it is the appellant’s expectation that they are unlikely to be used, to obtain effective tax relief for the appellant in the local jurisdiction.
Attachment Al (to the agreed statement of facts)
GROUP STRUCTURE FOR 1998 AND 1999
(all holdings 100 per cent)
Marks and Spencer plc
UK resident
Marks and Spencer International Holdings Ltd
Marks and Spencer (Nederland) BV
Dutch Resident
(Dutch Resident)
Marks & Spencer (France) SA Marks & Spencer (Deutschland) GmbH
(French Resident) (German Resident)
Attachment A2 (to the agreed statement of facts)
GROUP STRUCTURE FOR 2000 AND 2001
(all holdings 100 per cent except where shown)
Marks and Spencer plc
UK resident
Marks and Spencer
International Holdings Ltd
Marks and Spencer (Nederland) BV
Dutch Resident
(Dutch Resident)
Marks & Spencer (France) SA 67 per cent 33 per cent
(sold 31 December 2001) Marks & Spencer (Deutschland) (French Resident) GmbH
(German Resident)
SA Marks & Spencer (Belgium) NV
(Belgian Resident)
Agreed Addendum to statement of Facts
Clause 3.1.2 of the Agreement for the Sale and Purchase of Marks & Spencer France SA, dated 16 November 2001, provided:
“Completion of the sale and purchase shall be conditional upon the written approval confirming that all carried forward tax losses of the Company appearing in its board approved accounts as at 31 December 2001 can be transferred to the Purchaser ‘s Group.”
On 17 November 2001, the Purchaser entered into an agreement in the following terms:
“Further to having obtained information from the tax authorities, the Purchaser expressly and irrevocably waives the abovementioned condition precedent, which is therefore deemed satisfied.”
Clause 3.2 of an agreement, dated 28 December 2001, provided:
“The Purchaser states to the Vendors that by a letter received in November 2001 the tax authority indicated it would favourably examine the consent application that would be brought to it with a view to obtaining the transfer to the Purchaser of the tax losses of the Company brought forward to 31 December 2001.
The Purchaser declares being fully satisfied by the terms of the letter from the viewpoint of the Condition Precedent as stated in the Sale and Purchase Agreement.
Therefore, the parties hereby note the fulfilment of the Condition Precedent in article 3.1.2 of the Sale and Purchase Agreement within the time limits provided in article 3.2 of the Sale and Purchase Agreement.”