IN A TEST CASE of December 2005, the EU court allowed deductions equivalent to SEK 400 million for company losses in Marks & Spencer’s liquidated subsidiary in Belgium, France and Germany. This is one of many cases where the EU court determined that EU rights take precedence to national fiscal laws. Freedom of establishment and free capital mobility is considered more important than local fiscal laws. At the same time, tax bases in individual membership countries will be protected.
– The Marks & Spencer verdict opened up possibilities of using international group contributions with specific requirements, says Patrik Hild, tax lawyer at Grant Thornton.
THE GENERAL PRINCIPLE is that profits and losses should be managed where they occur. However, the Marks & Spencer verdict implies, in simple terms, that a Swedish subsidiary can pair surplus in the proper business against a foreign subsidiary through a group contribution where the parent company transfers means to the subsidiary. However, you can only deduct subsidiary losses from the parent company if the losses cannot be used locally. In principle, this is only applicable in two cases: if the subsidiary is liquidated or if there is a time limit for the use of deficits.
– You can find yourself in a situation where you don’t have a choice. Some countries have time limits when it comes to how many years the deficit can be postponed for pairing against a future profit. If time runs out, you can give group contribution and deduct it in the parent company, says Patrik.
HOWEVER, the Swedish Tax Agency and the National Tax Board look differently at what point in time the group contribution should be transferred from a parent company to a subsidiary about to be liquidated. The Tax Agency considers that the subsidiary must have been established for a year in order to allow group contribution and liquidated the year after. The National Tax Board believes that group contribution should be allowed the same year as the subsidiary liquidation for the right to deduction. Patrik believes that the National Tax Board is supported in both preparatory works as well as in practice. This is why the Supreme Administrative Court probably will emphasize the National Tax Board decision. But he doesn’t believe that the Swedish Tax Agency will reconsider company tax returns based on Tax Board guide lines where group contributions were allowed the year before liquidation.
ONE CASE CLARIFYING these group contribution rules is the so called Esab Oy verdict in July 2007. A Finnish subsidiary wanted a group contribution for the English parent company running at a loss. The EU court did not allow this. Consequently, group contributions can be passed downwards, ie from parent company to subsidiary, but not the other way around.
– If you want to use a group contribution, it is important to pay attention and talk to a tax consultant to look at your own country’s regulations as well as the other country’s.
Patrik concludes by advising companies who want to use group contributions to make an open statement about it in the tax return:
– The Swedish Tax Agency has strict requirements and will go to court in uncertain cases. If you leave an open claim, the Tax Agency will be required to investigate. If the claim isn’t open, you risk a tax surcharge if the company is not allowed deduction.
Text and photo: Eva Andersson