6.2 Current Situation of Corporate Taxation in the EU
6.2.3 Cross-Border Loss Offsetting
As already indicated, as compensation for the lack of a consolidation possibility in the first C(C)CTB implementation step, the EU Commission suggests the possibil- ity of cross-border loss offsetting with recapture. Based on this, the parent company in one Member State will be able to receive temporary tax relief for the losses of the subsidiary in other Member States. This proposal is similar to the previous directive proposals on the carry-over of losses and consolidation of foreign branch/subsidiary losses during 1984/1985 and 1990. Through the re-launching of the cross-border loss offsetting, the European Commission aims to eliminate another obstacle to the functioning of the Internal Market.
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In theory on loss relief, two basic models can be identified. The main charac- teristic of the first model is that loss is offset within one company (i.e., losses incurred by a branch or permanent establishment). The second model represents the situation when theloss is offset in the group of companies(parent and subsid- iary). Both of the above-mentioned models allow loss offsetting either within one state (domestic relief of loss) or across borders. While the domestic relief of loss within one company and even within the group is commonly implemented in all EU Member States,37cross-border loss relief in case of the group of companies is very rare and causes substantial obstacles in cross-border business on the Internal Market. The situation is displayed in Table6.2.
As is obvious from the above table, cross-border offset of losses between the parent and subsidiary company is possible only in seven EU Member States. This is perceived by the companies taking part in cross-border situations as an obstacle of prohibitive character that sometimes discourages companies from the cross-border business, not only in case of SMEs, but also in case of LEs. Basically, the losses are usually incurred by subsidiaries during the first years after establishment. In contrast to domestic losses, foreign losses cannot be offset against the profit of the parent in 21 EU Member States. There is also another aspect: when the subsidiary incurs losses every year and the parent in a different EU Member State always runs a profit, those losses cannot be offset as well. The first stage of C(C) CTB implementation (i.e., CCTB implementation with the indicated temporary cross-border loss offset regime) should address the above-stated issue.
Table 6.2 The application of domestic and cross-border loss relief (IBFD tax research platform 2016)
Type of the loss
relief Domestic loss relief Cross-border loss relief Within one
company (“perma- nent establishment”)
Automatically available in all 28 member states
Available in most cases Belgium, Bulgaria, Czech Republic, Netherlands, Austria, Portugal, Romania, Slovenia, Slovak Republic, Finland, Sweden, United Kingdom, Ireland, Italy, Croatia, Cyprus, Latvia, Lithuania, Luxembourg, Malta
Within a group of companies (“parent and subsidiary”)
Available under specific rules in most member states
In principle not available, with very few exceptions
Denmark, Germany, Spain, France, Ireland, Italy, Cyprus, Malta, Lithuania, Luxembourg, Netherlands, Austria, Poland, Portugal, Finland, Sweden, United Kingdom
Cyprus, Denmark, France, Italy, Lithuania, Luxembourg, Austria
37Based on the European Commission (2006), domestic relief within one company is available in all EU25. Currently, in 2016 in all EU Member States.
The European Commission (2006) mentions that the Member States that allow cross-border loss relief apply different methods than from those in the case of domestic relief. It would not be possible to apply the rules for domestic loss relief in cross-border situations, as they are not able to cover the needs of the cross-border situation. The methods used by Denmark, Italy, France, Cyprus, Lithuania, Luxembourg and Austria for cross-border loss reliefs are stated in Table6.3.
According to thesystem of consolidatedprofit in tax theory, profits and losses in a given tax year for selected or all group members are taken into account over a certain period of time at the level of the parent company. The system is designed as a comprehensive scheme, since it includes all subsidiaries of the group. The economic result of the group is taxed in the country, where the parent company is a resident. This is very often connected with the compliance costs of taxation, as all income of the group members has to be recalculated according to the rules valid in the state where the parent company is resident. Moreover, as is obvious from Table 6.3, only Austria applies the deduction (recapture) method. Under this system, losses incurred by the subsidiary situated in another EU Member State, which were deducted from the results of the parent company, are subsequently recaptured when the subsidiary starts to run a profit. A similar system is suggested by the European Commission as a temporary solution, which would partially replace the consolidation regime, without the newly re-launched CCTB rules.
Under suggested system, with respect to the scheme of temporary loss transfer (deduction/recapture), a loss incurred by a subsidiary situated in another Member State, which was deducted from the results of the parent company, is subsequently recaptured once the subsidiary returns to profitability. Such a system is relatively easy to operate. The losses are deducted at first and later, when the subsidiary returns to profit, the previous deducted loss is recaptured through a corresponding additional tax burden at the level of the parent company. In addition, Lithuania has also applied deduction method in the form of intra-group loss transfer, however, without recapture mechanism since 2016.
Table 6.3 Methods of cross- border loss relief used by member states that allow cross-border loss relief (IBFD tax research platform2016)
Member state Method of cross-border relief Cyprus Loss-offset only within the EUa Denmark System of consolidated profits
France System of consolidated profits
Italy System of consolidated profits
Luxembourg System of consolidated profits Lithuaniab Deduction (Transfer)
Austria Deduction (Recapture)
aUnder special conditions since 1 January 2015
bCross-border loss relief is available since 2016
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In case of the domestic loss relief within a group of companies, three models38 applied within the European Union can be identified, as mention in Nerudova´ and Solilova´ (2015a,b). First, the model ofintra-group relief of lossenables one group member to transfer its loss to a profitable group member. Under an intra-group contribution system, the profits from one group member can be transferred to a loss- making group member. In fact, the intra-group contribution system is used to eliminate losses; therefore, it has the same economic effect as system of intra- group loss transfer. The second applied model is the pooling system. It allows companies to aggregate all individual tax results (profit and losses) from the members of the group at the level of the parent company. The last model applied within the European Union is represented byfull tax consolidation. This system goes far beyond the pooling system, since for tax purposes, the legal personality of the group members and any intra-group transactions are disregarded. The result of the group is determined on the basis of single profit and loss accounts.