The European Commission has referred the UK to the EU Court of Justice (ECJ) for its tax legislation on cross-border loss relief.
The Commission says it believe Britain has failed to properly implement the ECJ's previous Marks & Spencer ruling (Case C-446/03) on the matter.
In 2005, the Court ruled that a parent company should not be prevented from deducting the losses of its subsidiary established in another member state, if all other possibilities have been exhausted.
It said that even though the UK amended its legislation after the judgement, 'it continues to impose conditions on cross-border group loss relief which, in practice, make it very difficult to benefit from. The Commission considers this to infringe the principle of non-discrimination and the freedom of establishment, set down in the Treaty'.
Algirdas Aemeta, commissioner for taxation, customs, anti-fraud and audit, said: 'Cross border loss relief is a basic need for businesses that expand beyond national borders. It is essential for entrepreneurship and for creating a positive business environment within the single market. I therefore urge the UK and all member states to respect the case law on this matter.'
The referral to the Court of Justice is the final step in the infringement procedure.
The issue dates back to 2003, when the UK High Court referred a preliminary question to the EU's Court of Justice about a case opposing Marks & Spencer to HM inspector of taxes David Halsey (Marks & Spencer plc v Halsey (HMIT) (Case C-446/03)).
In 2005, the Court ruled 'it is contrary to Articles 43 EC and 48 EC to prevent the resident parent company from [deducting from its taxable profits losses incurred in another member state by a subsidiary established in that member state] where the non-resident subsidiary has exhausted the possibilities available in its state of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party'.
The ruling is applicable to all member states.