Action on outstanding EU law tax disputes prior to Brexit

Wed 25 Oct 2017

With the Brexit timeline ticking away, and uncertainty on how tax matters affected by EU law will be dealt with as a result of the current terms of the European Union (Withdrawal) Bill, clients with UK businesses should be reviewing the appropriateness of challenging any tax issues affected by EU law prior to formal Brexit (subject to transition) on 29 March 2019.

In its letter of 10 October the CIOT highlighted a number of uncertainties on how the European (Withdrawal) Bill affects taxpayers’ EU law rights and whether its provisions can act retrospectively.  If there are outstanding tax matters which depend on how EU law is interpreted, some thought should be given as to whether it would be prudent for these matters to be addressed sooner rather than later.

An example of the sorts of issue that might be worth looking in to is the area of group relief involving UK branches. The CJEU 2012 decision in the Philips case (Case C-18/11) considered the UK rules providing that the loss of a UK permanent establishment (PE) was not available for group relief where it was, or could also be, (in any period) deductible or allowable against non-UK profits.  The Court held this was contrary to the EU principle of freedom of establishment where a similar rule did not also apply to UK companies.  The effect of the restriction meant that a non-UK company establishing a branch was at a disadvantage to one establishing a UK subsidiary company as far as group relief was concerned.

The UK Government introduced amendments to what is now CTA 2009 s.107 in FA 2013, with effect for accounting periods beginning on or after 1 April 2013 to deal with this. However those changes only marginally narrowed the scope of the restriction in the case of a PE of a non-UK but EEA company, to restrict the use of losses that were actually used against non-UK profits (rather than where they also could be used).  The position of UK companies was not changed.

Currently the hybrid and other mismatch rules would probably prevent a UK deduction for a PE loss incurred on or after 1 January 2017, where that loss was also deducted in an overseas territory (TIOPA 2010 part 6A chapter 10). However the position for pre 1 January 2017 losses of a PE of an EEA based non-UK company is not so certain.

In addition to considering UK breaches of EU law that have not yet been litigated, there may be domestic law issues in other EU member states that are not compliant with EU law. UK based groups should also be considering whether they need to challenge these issues before the date of formal Brexit.  One example in this area may be French dividend tax rules.  The difficulties with these rules from an EU law perspective were covered in an earlier Mazars blog.

For a discussion on the tax issues to consider when preparing for Brexit and other international tax matters, please get in touch with a member of the Mazars International Tax team.