In two recent cases, the ECJ clarified in which situations holding companies might be entitled to deduct final losses, thus confirming the principles previously established in the Marks & Spencer decision (C-446/03).
In the first decision, Memira Holding (C-607/17) dated 19 June 2019, a Swedish holding company had one German subsidiary, which was operating several ophthalmologic clinics and whose activity was not sustainable, so that the holding company decided to merge and absorb the German subsidiary. The Swedish tax authorities however wanted to deny taking into account the final losses deriving from the activity of the German subsidiary. The ECJ confirmed in this case that even if the jurisdiction of the subsidiary (i.e. Germany) does not allow the transfer of losses to another company liable for corporation tax in the event of a merger, this does not prevent the jurisdiction of the parent company (i.e. Sweden) from taking into account those losses. Indeed, if the parent company can demonstrate that it is impossible for it to deduct those losses in the jurisdiction of the subsidiary, the tax losses should be taken into account in the jurisdiction of the parent company.
In the second decision, Holmen AB (C-608/17), dated 19 June 2019, another Swedish holding company operated various subsidiaries in Spain, which were part of a fiscal unity. The activity was not viable and the entities were thus put into liquidation. The Swedish tax authorities refused to take into account, at the level of the parent company, the losses accumulated at the level of the subsidiaries held indirectly (i.e. sub-subsidiaries). In addition, Spanish law did not authorise the transfer of losses of a liquidated company in the year of liquidation.
In both cases, the ECJ stressed that the parent company carries the burden of proof in demonstrating that its subsidiaries’ losses are truly final. The Court seems to construe final losses as losses which cannot be used by a third party, in particular after a sale for a price including the tax value of the losses. Further, the ECJ confirmed that domestic law restrictions on the use of losses in the jurisdiction of the subsidiary are not decisive in determining whether the jurisdiction of the parent company must grant loss relief. As regards losses held by a sub-subsidiary, the ECJ held that the jurisdiction of the parent company may refuse to grant cross-border tax relief for losses held by an indirect subsidiary established in a different Member State than the direct subsidiary. However, if the indirect subsidiary is established in the same jurisdiction as the intermediate subsidiary, the jurisdiction of the parent company must grant cross-border tax relief for losses meeting the conditions set out in the Marks & Spencer decision (i.e. final losses).
In conclusion, the ECJ confirmed its previous conclusions on final losses and even opened the door, under certain conditions, for final losses deriving from indirect subsidiaries to be taken into account.