Marks & Spencer (M&S), a UK retailer, invoked articles 43 and 48 of the EC Treaty in an effort to use the losses generated by its subsidiaries in Belgium, Germany and France against its UK profits. In the ordinary course of events, M&S might have used these losses against profits generated by the subsidiaries in the relevant jurisdiction but M&S ceased trading in Belgium, Germany and France, leaving the subsidiaries awash with carry forward losses that were effectively useless or only partially useful.

The UK Inland Revenue rejected M&S's claim on the basis that group relief does not apply to losses generated by subsidiaries that are neither resident nor economically active in the UK. The argument before the European Court of Justice (ECJ) was that such a limitation on group relief infringed its freedom of establishment and was discriminatory.

Much has been written about the opinion of the Advocate General, delivered on April 7 2005, which, if past performance is any guide, is likely to be followed by the ECJ in its judgment later this year. It is a partial victory for the taxpayer and success for any particular claimant is likely to depend very heavily on the nuanced interplay of the tax systems of the loss-making subsidiary, and the profitable parent.

Any claim could involve quite a bit of management time since it is likely that the onus will be placed on the taxpayer to demonstrate that the foreign tax system did not provide effective relief for the losses of the subsidiary.

Irish corporate taxpayers have followed the case with interest since the Irish system of group relief is broadly similar to the UK system and thus, in principle, susceptible to the same type of challenge that the UK Inland Revenue faces. Certainly the Irish government felt strongly enough about the case to support the UK, the European Commission and other governments in arguing against M&S before the ECJ.

The intervention by the Irish government is likely to have been activated as much by a feeling that an important principle of tax sovereignty was at stake as by a fear that substantial tax revenue was at risk. This difference in approach is based on a crucial difference between Ireland and the other affected jurisdictions; namely that Irish taxpayers would generally be in a position of repatriating losses from a higher-taxed jurisdiction. The rate of Irish corporation tax in respect of trading income is now 12.5%. Although higher in the past, Irish rates of corporation tax have historically been lower than in other member states.

Therefore, an Irish taxpayer considering whether to bring a claim will have to consider very carefully the degree of difficulty in establishing that the foreign losses, in the words of the Advocate General: "cannot receive advantageous tax treatment in the State in which those subsidiaries are resident". This is a difficult hurdle in any case, but, in the case of Irish parents, the choice is rendered more acute by the fact that Irish rates of corporation tax on trading income may be lower than in other member states.

An Irish-resident parent, therefore, with loss making subsidiaries in member states, with higher tax rates will have to think carefully about the economics of attempting to repatriate losses to Ireland.

Caitriona McGonagle (caitriona.mcgonagle@mop), Dublin