The European Commission has referred the UK to the ECJ over its legislation on the attribution of capital gains to members of non-resident companies, and the taxation of transfers of assets abroad. The two pieces of legislation are designed to prevent assets being transferred or held overseas to avoid UK tax, but the Commission regards them as disproportionate and contrary to EU law on freedom of establishment and the free movement of capital.
The Commission considers the restrictions imposed by the two pieces of legislation to be disproportionate, and claims it goes beyond what is reasonably necessary to prevent abuse or tax avoidance.
Attribution of gains to members of non-resident companies
Under UK legislation, a parent company in the UK is taxed for the capital gains of its subsidiaries in other Member States, while no similar taxation exists when subsidiaries are located in the UK.
If a UK resident company acquires more than a 10% stake in a company resident in another Member State and the latter company disposes of an asset and realises a capital gain, this gain may be taxable in the Member State where that company is resident. However, this gain will also be immediately attributed to the UK company and therefore be liable to corporation tax. The UK company cannot avoid this tax charge, even if it proves that the relevant transactions were carried out for valid commercial reasons and lacked any tax avoidance purpose.
Taxation of transfers of assets abroad
UK legislation provides for a difference in treatment between domestic and cross-border transactions.
If a UK resident invests capital in a UK company, the company will employ the capital to generate income. In this situation, the company will be taxable on the income generated, but the investor will not be taxed until the company makes a distribution to him/her, for example by way of a dividend.
However, if a UK resident invests capital in a company in another Member State, the company is liable to be taxed in that Member State on the income it generates. This means that the investor would be subject to UK income tax on that income, even though the income has not been distributed to the investor.
The Commission's action to refer the UK to ECJ is the last step in the infringement procedure.
HMRC recently consulted on draft amendments to both pieces of legislation. The consultation closed on 22 October and a summary of responses will soon be published. The revised pieces of legislation are expected to be included in Finance Bill 2013.
