1. Case C-446/03 Marks & Spencer
Ida Virtanen

2. Facts
UK retailer M&S had subsidiaries in several EU Member States until 2001
The company has ceased trading in continental Europe owing to the losses recorded from 1990s
M&S claimed group relief from the UK tax authorities for losses incurred by its subsidiaries in Belgium, France and Germany
Under UK legislation resident companies in a group may set off their profits and losses among themselves but are not allowed to do so where the losses are incurred by subsidiaries which are not resident in the United Kingdom
-> M&S claim was refused
Following the refusal of its claim Marks & Spencer brought legal proceedings in the High Court, which asked the ECJ whether the UK provisions were compatible with the provisions of the EC Treaty on freedom of establishment

3. ECJ judgment of
Despite direct taxation is within the competence of the Member States, it must exercise that competence with respect for Community law
The UK different treatment for tax purposes to losses incurred by a subsidiary resident in the UK and losses incurred by a subsidiary in another Member State discourages discourage undertakings from setting up subsidiaries in other Member States
A restriction on freedom of establishment under TFEU Article 49
Such restriction permitted only under two conditions:
When pursuing a legitimate objective under the Treaty and be justified by overriding reasons in the public interest
it must also be apt to ensure the attainment of the objective in question and not go beyond what is necessary to obtain that objective (proportionate to its objective)

4. ECJ considered that the UK had a legitimate objective under the first condition:
A legitimate objective existed namely
to protect a balanced allocation of the power to impose taxation between the various MS concerned
the need to avoid the risk of the double use of losses
the desire to avoid the risk of tax avoidance

5. ECJ considered that the second condition was not fulfilled
UK legislation generally does not observe the principle of subsidiarity, at least in the following situations:
where the non resident subsidiary has exhausted the possibilities available for having the losses taken into account in its state of residence for the accounting period concerned by the claim for relief and also for previous accounting periods
where there is no possibility for the foreign subsidiary’s losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party

6. Thus where in one Member State the resident parent company demonstrates to the tax authorities that those conditions are fulfilled (legitimate objective, proportionate and necessary), it is contrary to freedom of establishment to preclude the possibility to deduct from its taxable profits in that Member State the losses incurred by its non- resident subsidiary
The Court ruling has the effect of reinforcing the internal market by requiring the elimination of inordinately discriminatory tax laws for traders who move within the European Union

7. The Finnish system
Group contribution system in Finland is a mirror of the UK group relief system
It applies to to transfer of profits rather than surrender of losses
Finnish system requires that to tax deduction arising from the transferred profits there is a corresponding taxation of te profits received
M&S reasoning not applicable due to different systems