Europe forces consultation on two anti-avoidance rules

by Calum Fuller

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31 Jul 2012

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European commission

A CONSULTATION has been launched on the reform of two anti-avoidance provisions by the taxman after the European Commission found existing rules contravened its free market principles.

Proposed amendments to UK legislation would address the tax implications of UK residents holding gains in non-resident companies and the transfer of assets abroad. The rules exist to prevent assets being transferred and held abroad in order to avoid UK tax.

Currently, UK individuals who invest assets in businesses in other EU countries are taxed on income generated by that company, rather than the company itself bearing the burden as it would in the UK. The EU says this goes against its European Economic Area agreement.

Instead, under the consultation rules, UK-resident taxpayers with investments in foreign companies would pay UK tax on the same basis as an investment in a UK company and not potentially on all of the income received by the foreign company.

Also against the EU's principles are issues around UK companies owning foreign businesses. Under current rules, if a UK company acquires more than 10% of a business in another EU member state, capital gains realised from the sale of an asset are immediately attributed to the UK company. The UK business is then liable for corporation tax on the gains. If, on the other hand, the UK company had invested in another UK-resident company, only the latter would be taxable on its capital gains.

Under the consultation, the foreign business will be treated in the same way as the UK one.

The proposals see the taxman consider whether the transfer was part of genuine commercial activity, balancing the undertaking of commercial transactions against the prevention of tax avoidance.

Provided a transaction forms part of a legitimate commercial activity, the revised rules would not apply, or would only apply to a particular element that has no commercial purpose.

Ray McCann, director at law firm Pinsent Masons, said the rule changes could see refund claims lodged with the taxman.

He said: "There's now potentially an opportunity for businesses and individuals who have lost out under the current rules to try and reclaim their payments from the government where the rules have been applied in a way contrary to EU law. Successful claims could cost HMRC millions of pounds."

The consultation will run for 12 weeks until October 2012, with a view to allowing rules to come into force in April 2013.

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