UK and International Tax news

Closely Controlled Non Resident Companies Condoc

Tuesday 31st July 2012

In March 2011 we reported that the EC had formally requested the UK to amend two discriminatory anti-abuse tax rules which related to the transfer of assets abroad and attribution of gains to members of non-UK resident companies. The requests took the form of reasoned opinions.  HMRC have now issued a consultative document on the reform of these two anti avoidance measures.

The transfer of assets abroad legislation [s.714+ ITA07] applies where a UK resident individual invests in an overseas company by transferring assets to it.  If this company is incorporated and managed in another member state, the investor is subject to tax on the income generated by the company to which he/she contributed the assets. However, if the same individual invested the same assets in a UK company, only the company itself would be liable for tax.

Under the attribution gains to members of non-UK resident companies’ regime [s.13 TCGA92], if a UK resident shareholder acquires more than a 10% share of a company in another member state, and the overseas company realises capital gains from the sale of an asset, the gains are immediately attributed to that shareholder, which becomes liable for tax on these capital gains. However, if the shareholder had invested in a UK resident company, only the company would be taxable on its capital gains, not the shareholder until the gains were distributed.

The EC considered there to be discrimination in both cases because investments outside the UK are taxed more heavily than domestic investments. The difference in tax treatment between domestic and cross-border transactions restricts two fundamental principles of the EU’s Single Market, namely of the freedom of establishment and the free movement of capital contrary to Arts 49 and 63 TFEU and Arts 31 and 40 of the EEA Agreement.

The EC is of the opinion that both restrictions are disproportionate, in the sense that they go beyond what is reasonably necessary in order to prevent abuse or tax avoidance and any other requirements of public interest.

The closing date for comments on the condoc is 22 October 2012 and the proposals will be reviewed in the light of responses, with a view to introducing legislation in the 2013 Finance Bill.

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