Cross Border Loss Utilization

Julie Zachariassen

Student thesis: Master thesis


The issue of transfers of tax losses within international groups of companies is a recurring one in European tax law. It has given rise to some of the most important decisions of the European Court of Justice (ECJ) concerning national direct taxes. The topic of the thesis is in which situations companies can claim for cross- border loss relief, and in which situations the member states has the possibility to apply recapture rules for deducted losses.
The thesis concludes that the Danish group relief rules are disproportionate and therefore not in compliance with EU law, as they do not allow for deduction of final losses as companies always has the right to plead. Thus the proportionality assessment seems rather week in several of the ECJ’s decisions, since one could imagine less restrictive rules for example immediate loss deduction and later recapture if the subsidiary shows profits in subsequent years.
Losses may be defined as final due to legal or factual circumstances, where the first mainly deals with carry- forward possibilities in the resident state of the subsidiary, and the second mainly deals with situations where the subsidiary is liquidated. Thus the Court points out that according to settled law, the fact that the source state precludes all possibility of losses being carried forward cannot oblige the state of the parent company to take the losses into account. The Court has further concluded that a factual impossibility exists only, if the subsidiary no longer has any income in its state of residence, as even minimal income states that there is a possibility that the losses may be offset against future profits. Mainly losses are to be concluded as final when the non-resident subsidiary has exhausted the possibilities available in its state of residence having the losses taken into account for the accounting period concerned, for previous periods and for future periods either by the subsidiary itself or by a third party. The reference date of the assessment of the final losses is another important topic, as the ECJ neither has pointed out in which year it has to be made, or in which year the loss may be deducted. Thus Denmark has no guidance as to these matters, why the British rules may be noticed, where the assessment is made immediately after the year in which the losses has accrued, and the deductible in year in which it has occurred.
The thesis further concludes that parts the Danish recapture rules are not in compliance with EU law, as full recapture taxes more than the profits of liquidation. It seems that a taxation that exceeds the losses that has been previously deducted is disproportionate, why the rules of ordinary recapture are in fact in compliance with EU law. Parts of the principles of the current ordinary recapture rules seem to be possible to transfer into new rules regarding recapture of deducted cross-border losses. It is in these cases important to notice which member state that has the tax jurisdiction for the profits of the subsidiary, which Denmark never has according to the Danish territoriality principle. Therefore the recapture is inextricably linked to the previous deduction of the loss.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2016
Number of pages79
SupervisorsMichael Tell