UK and International Tax news

EC Requests UK To Amend Two Anti Abuse Regimes

Friday 4th March 2011

The European Commission (EC) has formally requested the UK to amend two discriminatory anti-abuse tax regimes which relate to the transfer of assets abroad and attribution of gains to members of non-UK resident companies. The requests take the form of Reasoned Opinions (the second step of an infringement procedure). In the absence of a satisfactory response within two months, the EC may refer the UK to the ECJ.

The first infringement relates to the UK’s “transfer of assets abroad” legislation which 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.

The second infringement relates to the attribution gains to members of non-UK resident companies’ regime. Under this legislation, if a UK-resident company acquires more than a 10% share of a company in another member state, and the latter company realises capital gains from the sale of an asset, the gains are immediately attributed to the UK company, which becomes liable for corporation tax on these capital gains. However, if, the UK company had invested in another UK resident company, only the latter would be taxable on its capital gains.

The EC considers 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 Art 49 and Art 63 of the Treaty on the Functioning of the European Union (TFEU) and Art 31 and Art 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.

 If you would like more information on the above, please contact Keith Rushen on +44 (0)20 7486 2378

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