In Esso Exploration and Production UK Limited and others v HMRC , the First-tier Tribunal provides further clarity on issues relating to claims for Cross Border Group Relief.
The Esso Exploration and Production UK Limited and others v HMRC  (Esso) decision concerned a Danish loss making company (EMDH) attempting to surrender losses to UK companies with a common ultimate US parent. The link between the Danish company and the UK Cross Border Group Relief (CBGR) claimant companies was remote with various intermediate subsidiaries below the ultimate US parent company in the structure. HMRC argued successfully that the claims should fail as there were intermediate companies in different member states to EMDH (see CJEU cases Memira (C-607/17) and Holmen (C-608/17)).
The Appellant’s CBGR claims were made prior to the legislative change in Finance Act 2006 (now rewritten in CTA 2010) which extended group relief to cover certain cross border losses in restricted circumstances. The legislation at the time (s402 ICTA 1988) did not provide for EU/EEA losses to be utilised in the UK. However, this was challenged in case C-446/03 Marks & Spencer plc v Halsey where the CJEU determined that CBGR could be available if there was no possibility of using the losses in the home state.
In support of their CBGR claims the Appellants relied on a potential breach of their freedom of establishment, engaged directly or through the US/UK Double Tax Treaty (DTT). The appeal also concerned whether losses could be considered ‘definitive’.
Freedom of Establishment
Following Holmen and Memira HMRC argued that even if the freedom of establishment was engaged the appeal should fail. The First-tier Tribunal (FTT) agreed that the holding structure of the group with intermediate companies in other member states between the surrendering and claimant companies prevented CBGR being available. In addition to the findings on Holmen and Memira, the FTT held that the Appellants were not able to rely upon freedom of establishment directly in any event, as there was only a remote connection between EMDH and the Appellants through its ultimate US parent and the freedom of establishment of EMDH’s parent could not be relied upon where there is no connection to the UK.
US/UK Double Tax Treaty (DTT)
The Appellants also argued that if EU law could not be engaged directly then it could be engaged indirectly, via the non-discrimination article (NDA) in the UK/US Double Tax Convention. The basis of the argument pivoted on the parent company of the group being US based, resulting in the Appellants being subjected to taxation more burdensome than that suffered by a comparable hypothetical UK resident company with a UK parent.
It was held that the NDA did not extend to the transfer of losses between a non-resident and a resident enterprise as there was no discrimination. The Judge noted that as the US has no concept of freedom of establishment, and as EU Member States agreed the parameters of the rights extended to their respective residents, if residents of a third state could access those rights by invoking a DTT NDA it would be disruptive to the operation of EU law.
No possibilities test
The decision confirms that Marks & Spencer remains good law for assessing when the no possibilities test should be met for pre-FA06 periods, specifically that the test must be met at the time of the claim. This differs to the timing for post-FA06 periods, where losses must be definitive at the end of the relevant accounting period.
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