Euro Tax Flash Issue 392 - AG Opinions on cross-border loss relief

The AG first notes that in both cases a restriction to the freedom of establishment exists, as Swedish law allows full loss relief between Swedish group companies, whereas deductibility of losses incurred by a non-resident subsidiary is limited by certain conditions. She further notes that based on settled case law, both resident and non-resident loss-making subsidiaries are in a comparable situation.

She then addresses whether such a restriction is justified by overriding reasons of public interest. As regards the avoidance of the double use of losses, she underlines that the risk seems non-existent or limited, and if applicable, it would then be for the Swedish Court to determine whether the losses of the foreign subsidiary are in fact final and could therefore be used twice. With respect to the need to ensure a balanced allocation of taxing rights between Member States, the AG observes that allowing the transnational use of a subsidiary’s losses incurred over the years would undermine the fiscal autonomy of the Member States involved. She further notes that in the cases at hand, the ‘Marks & Spencer exception’ does not apply, as the condition of losses which are usable in law, but not in fact, is not satisfied. In that respect, the AG interprets the CJEU’s finality requirement (i.e. all avenues for taking the losses into account have been exhausted) as also covering losses being transferred to a third party by way of a sale. She concludes that if the taxpayer has the possibility to sell the subsidiary (and therefore transfer the losses) rather than liquidate or merge it, such losses cannot be final. Finally, the AG rejects the applicability of the ability-to-pay principle, as developed by the CJEU in the recent Bevola decision (C650/16), to the cases at hand and further concludes that cross-border loss relief may threaten an EU ‘fair internal market’.

The AG consequently concludes that the losses cannot be considered as final, although she recognizes that in both cases no activities remain in Germany or Spain respectively after the liquidation of the loss-making subsidiary there. As regards the Memira case, this results from the combined facts that carrying over losses to another company by way of a merger is not possible under German law and that the parent company did not choose to transfer losses to a third party by way of selling its subsidiary, although this was legally possible under German law. She further adds in the Holmen case that losses incurred by an indirectly owned subsidiary cannot in principle be considered as final losses at the level of the ultimate parent company. The AG therefore seems to imply that the ‘Marks & Spencer exception’ can never be used in practice.

In her Opinion, the AG adopts a very restrictive interpretation of the ‘Marks & Spencer exception’ and seems to suggest from the outset that the CJEU should consider abandoning it altogether. It remains to be seen whether the CJEU will follow the AG’s Opinion in this respect or provide additional insight on what should be considered as final losses. However, it should be noted that although AG Kokott had already adopted a similar position in several Opinions, the CJEU has not always followed her and has consistently upheld the ‘Marks & Spencer exception in the past.