Brussels attacks UK offshore anti-avoidance rules

21 February 2011

The European Commission has challenged two anti-avoidance measures imposed by the UK on taxpayers who invest in non-UK resident firms.

The first rule concerns taxation of assets transferred abroad from the UK, as set out in ss.714-751 of ITA 2007. It requires a UK resident investor who transfers assets to a foreign company to pay tax on the income generated by that foreign company – although if that company had been based in the UK, only the company itself would be liable for tax,  not the shareholder.

According to the Commission, this rule deters UK residents from investing in companies other EU member states, and is thus forbidden by the EU rules on free movement of capital.

The other rule under fire from the Commission is one used by HM Revenue & Customs to attribute capital gains to shareholders of foreign companies, under s.13 of TCGA 1992. The rule states that a UK-resident company that owns a large share of a foreign company (more than 10 per cent of its equity) is liable to pay immediate corporate CGT on any disposals made by the foreign company.

That rule does not apply where the company making the disposal is also UK-resident – so again the Commission says it is against EU legislation.

The function of both rules, from the UK’s point of view, is to stop taxpayers reducing their tax liability on income and capital gains by holding them through a foreign entity.

At the moment, the dispute is in an early stage with the  Commission having merely sent the UK government a “reasoned opinion”. According to the FT, the UK has replied that it does not accept it is infringing EU rules (but all EU member countries always say this whenever criticised by the Commission).

Neither a change in UK tax law nor litigation to enforce the Commission’s will are in sight. But commentators consider the controversy could have significant impact on the Treasury’s plans.

The head of KPMG’s UK private client practice, David Kilshaw, said a  change in the law could have a profound impact on how foreign businesses and investments are held.

He predicted that the UK government will respond by trying to waive the rules where EU companies are being used for “genuine business purposes” rather than for tax planning.

“The landscape as we know it is set to change forever”, said Kilshaw. “UK taxpayers should review their existing structures and urgently consider any steps which should be taken.”




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