The Court of Justice of the European Union has found that the UK’s consortium loss relief laws are not compatible with EU law. The UK provisions requiring that a “link company” must be established in the UK for companies to be entitled to consortium group relief was found to infringe on the freedom of establishment in Case C-80/12, Felixstowe Dock and Railway Company Ltd and Others v The Commissioners for HMRC.

In the United Kingdom, losses may be transferred between a company that is a member of a consortium and another company that is owned, directly or indirectly, by the consortium. Losses may also be transferred between a company that is a member of a group and a company owned by a consortium where they are connected by a third company (link company) which is a member of both the group and the consortium. However, UK tax law provides that the link company involved in the transfer of losses must be resident in the UK for tax purposes or must have a permanent establishment there.

The case in question involved a Luxemburg resident linking company. HMRC rejected consortium loss relief claims by UK resident companies in the group on the basis that the link company involved in the transfer of losses was neither a resident in the United Kingdom for tax purposes nor had a permanent establishment in the UK. The First-tier Tribunal (Tax Chamber UK) referred the taxpayer’s challenge to the European Court of Justice for a judgment as to whether the UK tax law restrictions on the transfer of losses is compatible with the freedom of establishment.

In its judgment, the Court of Justice found that the residence condition applicable to the link company introduces a difference in treatment between resident companies connected by a UK link company, which are entitled to the tax benefit, and resident companies connected by a link company established in another EU Member State of the EU, which are not entitled to the tax benefit. That difference, according to the Court of Justice, makes it less attractive in tax terms to set up a link company in another EU Member State, and thus constitutes a restriction on freedom of establishment.

For further information see the Court of Justice’s press release or the full judgement available on their website.