| Author: |
Hans van Capelleveen, PricewaterhouseCoopers |
| Publication: |
The Prague Post |
| Date: |
28 April 2005 |
Taxing matters
When people think of taxes and the European Union, the first thought is normally of value added tax (VAT) and customs duties. However, as an EU Member, the Czech Republic is subject to the jurisdiction of the European Court of Justice (ECJ). In very simple terms, the role of the ECJ in direct tax matters is to rule against discrimination between taxpayers on the basis of their nationality. The recent case involving British retailer Marks & Spencer has confirmed the potentially enormous impact of the ECJ for EU Member States.
Foreign subsidiary losses: deductible?
Marks & Spencer had lossmaking subsidiaries in Germany, Belgium and France. UK tax law did not allow Marks & Spencer to deduct these losses in calculating its UK tax. If the subsidiaries had been in the UK, Marks & Spencer would have been allowed to deduct the losses. It claimed that this was discrimination under the so-called Freedom of Establishment rules. In addition to these rules, legislation of member states that makes setting up a foreign subsidiary less attractive than a local one is generally not allowed.
The opinion of the Advocate General, an adviser of the ECJ, basically confirmed Marks & Spencer's position, subject to certain limitations. It is generally expected that the ECJ will follow this opinion in its own decision, which is hoped to be reached within six months. As a result, it is estimated that EU Member States may suffer tax revenue losses amounting to billions of euros.
Czech impact
As Czech law does not contain group relief rules, the immediate reaction appears straightforward. A confirming court decision will most likely have little impact. Perhaps more significant than the outcome itself is the clear impact ECJ decisions can have on local jurisdictions. The decision could make the introduction of a group relief or similar regime in the Czech Republic less likely, or at least very restrictive. Another consequence may be that EU companies with loss-making Czech subsidiaries will need to ascertain the amounts at stake and consider appropriate action to benefit.
While at first glance the consequences of this decision may seem insignificant, a closer look reveals a deeper issue. Group relief is only one issue in corporate taxation. The real issue is: Where does Czech tax law contain instances of discrimination that are potentially subject to attack by the ECJ?
