April 1 (Bloomberg) -- Hutchison Whampoa Ltd. won a bid for tax relief on losses by its U.K. mobile-phone unit after a ruling by the European Union’s highest court added to the U.K.’s fiscal woes.
British law restricting tax relief for companies based outside the country violates EU rules, the EU Court of Justice in Luxembourg ruled today in a boost to the Hong-Kong based company, controlled by Asia’s richest man Li Ka-shing.
“The importance of the case is that it establishes a principle of much wider application, which is the fact that an EU company held by a non-EU company does not affect it claiming its European rights,” Chris Morgan, head of tax policy at KPMG LLP in London, said by telephone.
It’s the second time in a week that the U.K. lost out in tax battles with billionaires. The British government may have to pay about 1.2 billion pounds ($2 billion) to David and Frederick Barclay’s Littlewoods home-shopping company after a London judge on March 28 ruled in favor of Littlewoods’s claim for compound interest on refunds for more than 30 years of overpaid value-added tax.
While in today’s case “huge sums” aren’t at stake, the ruling clarifies that U.K. tax authorities can no longer justify rejecting requests based on a parent company being based outside the EU, said Morgan.
The EU’s top court, in a precedent-setting case involving Marks & Spencer Group Plc in 2005, ruled that EU rules allow companies to deduct foreign losses from their tax bill in some cases. In a case involving Royal Philips Electronics NV, the court further clarified that the U.K. must allow the local unit of a Dutch company to deduct losses from its British tax bill.
Today’s decision is “going to be important for lots of M&S type claims” that are pending where a U.K. company is claiming a loss from its subsidiary and the ultimate parent is based outside the EU, said Morgan. Her Majesty’s Revenue & Customs, the U.K.’s tax authority, “were resisting that.”
The ruling clarifies that British law is illegal by making group relief claims only possible if an intermediate parent company, or link company, is U.K. based.
The EU court said this is an unlawful restriction and that such claims must be allowed for any claimant with a link company based in the EU. In such a case it’s irrelevant if the ultimate parent company is non-EU based, it said.
“Neither the preservation of powers of taxation as between” EU nations “nor the combating of tax avoidance can properly be relied upon in support of such a system” as in the U.K., ruled the EU court.
HMRC said in an e-mailed statement that it “is considering the judgment carefully.”
Hutchison Whampoa companies, which include the U.K.’s Superdrug and the British arm of the Dutch Kruidvat health-care chains, sought relief for the losses of Hutchison 3G U.K.
“We are pleased with today’s judgment,” Christian Salbaing, deputy chairman of Hutchison Whampoa Europe Ltd., said in an e-mailed statement. “It confirms the basis of our consortium relief claims.”
Hutchison Whampoa shares advanced 2.3 percent in Hong Kong trading.
The U.K. Tax Tribunal in 2012 sought the EU court’s guidance on whether the country’s rules were in line with the bloc’s law.
The case is: C-80/12, Felixstowe Dock and Railway Company Ltd., Savers Health and Beauty Ltd., Walton Container Terminal Ltd., AS Watson card Services (U.K.) Ltd., Hutchison Whampoa (Europe) Ltd., Kruidvat U.K. Ltd., Superdrug Stores Plc v. The Commissioners for Her Majesty’s Revenue & Customs.
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