The UK has amended its rules on Group Relief for companies resident in the European Economic Areas following a ruling by the Court of Justice of the European Union in September 2012 which said that the UK’s group relief rules were in breach of the EU’s freedom of Establishment Provisions.
The HMRC recognizing that the UK group relief provisions are at odds with the EU law have set out a legislative change to section 107 Corporation Tax Act 2010 which will come into effect from 1st April 2013. The change means that a different restriction will apply for EEA resident companies based on whether the losses attributable to their UK PE’s are actually relieved in another country, rather than on whether they could potentially be relieved in another country. This should ensure that losses are not relieved twice, once as group relief in the UK and then again in another country. Currently non-UK resident companies resident in the EEA are subject to the same rules as non-EEA resident companies. This legislation will only apply for EEA resident companies and non-EEA resident companies will not be affected.
The amendments will prevent a non-UK resident company that is resident in the EEA from surrendering group relief for a loss or other amount attributable to its UK PE to the extent that it is relieved against the non-UK profits of any other person in any period. Where an amount that has been surrendered as group relief is later used against non-UK profits, then the benefit of the UK group relief will be withdrawn to the extent that the amount has been relieved elsewhere.
Non-UK resident company’s carrying on a trade in the UK through a PE have been able to participate in group relief since 1 April 2000. In order for the non-UK resident company to surrender a loss or other amount as group relief three conditions needed to be met.
– The loss or other amount is attributable to activities of the Company’s UK PE in respect of which the company is within the charge to corporation tax.
– The loss or other amount is not attributable to activities of the company that are exempted from taxation under a double taxation treaty
– The loss or other amount does not correspond to, and is not represented in, an amount that is deductible or otherwise allowable for tax purposes against non-UK profits of any person in any period
Basically the first two conditions ensure that group relief is available only for amounts that would have been taxable in the UK. The amending legislation allows that if the surrendering company is established in the EEA then it need only meet conditions one and two and no longer have to meet condition three. Instead these losses will be subject to a new restriction whereas it may not surrender losses and other amounts that meet conditions one and two if they are deducted from, or allowed against, non-UK profits of any person in any period.
This operates on the basis of whether losses and other amounts are deducted from, or otherwise allowed against, non-UK profits in any period. Where losses and other amounts are used in another jurisdiction after a notice of consent to surrender has been made, this will reduce the total amount available for surrender. As a result the surrendering company may need to take action in order to reduce the losses and other amounts it has surrendered.
The new restriction provides that if relief is given elsewhere for part of the loss or other amount, then the remaining unused part will be available for surrender as group relief. Where losses and other amounts attributable to the UK PE are relieved in another jurisdiction they will be calculated in accordance with the tax rules of that other territory.