Case C‑608/17

Skatteverket

Holmen AB

(Request for a preliminary ruling from the Högsta förvaltningsdomstolen)

Judgment of the Court (First Chamber), 19 June 2019

(Reference for a preliminary ruling — Corporation tax — Group of companies — Freedom of establishment — Deduction of losses of a non-resident subsidiary — Concept of ‘final losses’ — Application to a sub-subsidiary — Legislation of the State of establishment of the parent company requiring direct ownership of the subsidiary — Legislation of the State of establishment of the subsidiary restricting the set-off of losses and prohibiting them from being set off in the year of liquidation)

Freedom of establishment — Tax legislation — Corporation tax — Scheme applicable to intragroup financial transfers — National legislation providing for the right to transfer to the parent company for tax purposes the losses sustained by a non-resident subsidiary — Losses classified as final — Concept — Non-resident entity having sustained the losses being a non-resident sub-subsidiary of the parent company — Lawfulness — Limits

(Arts 49 and 54 TFEU)

(see paragraphs 23-32, operative part 1)
Freedom of establishment — Tax legislation — Corporation tax — Scheme applicable to intragroup financial transfers — National legislation providing for the right to transfer to the parent company for tax purposes the losses sustained by a non-resident subsidiary — Losses classified as final — Assessment of finality — Legislation of the State of establishment of the subsidiary restricting the set-off of losses and prohibiting them from being set off in the year of liquidation — Irrelevant — Exception

(Arts 49 and 54 TFEU)

(see paragraphs 36-40, 42-45, operative part 2 and 3)

Résumé

In its judgments in Memira Holding (C‑607/17) and Holmen (C‑608/17) delivered on 19 June 2019, the First Chamber of the Court was called upon to clarify the case-law arising from the judgment of the Grand Chamber of 13 December 2005, Marks & Spencer (C‑446/03, EU:C:2005:763). It was called upon to interpret Article 49 TFEU, read in conjunction with Article 54 TFEU, in two disputes concerning the possibility for a parent company established in one Member State of deducting from its corporation tax the losses of subsidiaries or sub-subsidiaries established in other Member States.

The Swedish tax legislation at issue provided for two schemes, one for ‘qualifying’ mergers of undertakings and the other for intragroup financial transfers, allowing a company to take into account losses incurred by companies other than itself. In both cases, Swedish parent companies had applied for a preliminary decision by the Skatterättsnämnden (Revenue Law Commission) in order to determine the tax consequences of the cessation of the activity carried on by their non-resident subsidiaries. The case of Memira Holding concerned a merger involving a subsidiary being dissolved without liquidation, while the case of Holmen concerned either the liquidation of a subsidiary, or the absorption of that subsidiary by a sub-subsidiary in a reverse merger followed by a liquidation of the new grouping.

In that regard, the scheme applicable to qualifying mergers makes the right of deduction conditional on the subsidiary which sustained the losses being liable for tax in Sweden. For its part, the scheme applicable to intragroup transfers requires that the subsidiary sustaining the losses be directly owned by the parent company. As the preliminary decisions were the subject of appeals before the Högsta förvaltningsdomstolen (Supreme Administrative Court, Sweden), that court referred questions to the Court of Justice for a preliminary ruling, referring to the judgment in A ( 1 ) and taking the view that that judgment does not specify whether the right to deduct final losses requires the subsidiary to be directly owned by the parent company or whether, in order to assess the finality of a subsidiary’s losses, account should be taken of the possibilities afforded by the legislation of the subsidiary’s State of establishment to other legal entities of taking into account those losses and, if so, how that legislation should be taken into account.

In the case of Memira Holding, the appellant company owned a loss-making subsidiary in Germany which, upon cessation of its activity, maintained only debts and certain liquid assets on its balance sheet. That company considered absorbing that subsidiary in a cross-border merger which would have led to that subsidiary being dissolved without liquidation, thus putting an end to all activities carried on by the appellant company in Germany. However, under German law, it is not possible to transfer such losses to an undertaking which is liable for tax in Germany in the event of a merger.

Hearing the appeals against the preliminary decisions at issue, the Högsta förvaltningsdomstolen requested the Court to determine, in particular, whether, in the case of Memira Holding, in order to assess whether a loss sustained by a subsidiary established in a Member State other than that of the parent company is final within the meaning given in the case-law resulting from the judgment in Marks & Spencer, ( 2 ) it is necessary to take into account the fact that, under the rules of the subsidiary’s State, there are restrictions on the possibility for entities other than the entity which sustained the loss to deduct the loss and, if so, whether there actually is another party in the subsidiary’s State which could have deducted the losses if such a deduction had been authorised there.

The Court began by recalling that, according to its case-law, the restriction at issue may indeed be justified. However, it will be disproportionate if the loss is final and the non-resident subsidiary has exhausted the possibilities available in its State of establishment of having the losses taken into account. In that regard, the Court explained that the losses at issue will not be classified as final if there is a possibility of deducting those losses economically by transferring them to a third party. The grounds relied on by the Court in its judgment in Marks & Spencer expressly envisaged that the absence of such a possibility on which the finality of the losses depends may be applied to the situation in which they are taken into account by a third party for future periods, in particular where the subsidiary has been sold to that third party. In that context, the Court explained that it cannot be excluded that a third party may take into account for tax purposes the losses of the subsidiary in that subsidiary’s State of establishment by including in the selling price of the subsidiary the tax advantage represented by the deductibility of losses for the future. Consequently, it is for the appellant company to demonstrate that that possibility is precluded, as the mere fact that the law of that State does not allow the transfer of losses in the event of a merger cannot, in itself, be sufficient to regard the losses of the subsidiary as being final.

In the case of Holmen, the appellant company owned several sub-subsidiaries in Spain, one of which had accumulated significant losses, and intended to liquidate its Spanish activity. Those losses were not deductible in Spain, because of the impossibility in law to transfer the losses of a liquidated company in the year of liquidation, or in Sweden, because of the requirement that the subsidiary sustaining final losses be directly owned.

The Högsta förvaltningsdomstolen asked the Court whether the right — which follows in particular from the judgment in Marks & Spencer — for a parent company established in one Member State to deduct, on the basis of Article 49 TFEU, the final losses of a subsidiary established in another Member State requires that the subsidiary be directly owned by the parent company, or whether that right to deduct also applies to the sub-subsidiaries.

The Court began by recalling that a condition which leads to the exclusion of cross-border group relief in certain circumstances may be justified by overriding reasons of the public interest referred to in the judgment in Marks & Spencer, but that that condition must be apt to ensure the attainment of the objectives pursued and not go beyond what is necessary to attain them. In that regard, the Court distinguished two alternatives.

Under the first alternative, the intermediate subsidiary or intermediate subsidiaries between the parent company applying for group relief and the sub-subsidiary sustaining losses that could be regarded as final are not established in the same Member State. In that case, it cannot be excluded that a group may choose in which Member State the final losses are used, opting either for the Member State of the ultimate parent company or for the Member State of any potential intermediate subsidiary. Such an option would permit the adoption of strategies for the optimisation of the group tax rate, which could jeopardise both the preservation of the balanced allocation of the power to impose taxes between the Member States and give rise to a risk that the losses could be used multiple times.

Under the second alternative, the intermediate subsidiary or intermediate subsidiaries between the parent company applying for group relief and the sub-subsidiary sustaining losses that could be regarded as final are established in the same Member State. In those circumstances, the risks of optimisation of the group tax rate by choosing in which Member State the losses are set off and of the use of losses multiple times correspond to those noted by the Court in paragraphs 45 to 52 of the judgment in Marks & Spencer. It would therefore be disproportionate for a Member State to impose a requirement of direct ownership such as that at issue in the main proceedings where the conditions in paragraph 55 of the judgment in Marks & Spencer have been met.

( 1 ) Judgment of the Court of 21 February 2013, A (C‑123/11, EU:C:2013:84).

( 2 ) Judgment of 13 December 2005, Marks & Spencer (C‑446/03, EU:C:2005:763).