The freedom of establishment and intra-group transfers
Our pick of this week's cases
In Gallaher v HMRC [2019] UKFTT 207 (25 March 2019), the FTT disapplied the charge to CGT on an intra-group transfer which did not fall within the scope of TCGA 1992 s 171, in breach of the principle of freedom of establishment.
Gallaher was a UK company and an indirectly wholly-owned UK resident subsidiary of JTIH, a company resident in the Netherlands, which held its interest in Gallaher through four wholly-owned UK resident subsidiaries. JTISA was a directly wholly-owned Swiss resident subsidiary of JTIH. The appeal related to two disposals by Gallaher. In 2011, it had sold intellectual property rights to JTISA and in 2014, it had sold all of the issued share capital in one of its subsidiaries to JTIH. The issue was whether the fact that Gallaher was unable to rely on TCGA 1992 s 171 to avoid the charge to CGT on both disposals (because both transferees were outside the UK tax net) was contrary to EU law.
In relation to the 2014 disposal, it was accepted that the fact that the disposal to JTIH triggered a liability, where none would have occurred, had JTIH been UK resident, was a restriction to the freedom of establishment, and the FTT rejected HMRC’s submission that the restriction was justified. The restriction was therefore unlawful and two remedies were available; a conforming interpretation of s 171 and the disapplication of the provision. The FTT considered that, even though the most appropriate option for a conforming interpretation of s 171 would be to amend the UK legislation to provide for an option to pay the tax by way of instalments, it was not equipped to decide ‘which of the vast array of possible instalment payment options should be selected’; any decision as to the precise basis on which deferred payment by way of instalments should be offered was a matter for Parliament.
It was also ‘not obvious’ how disapplication should work in circumstance where the infringement of EU law was caused not by the provisions of the UK legislation which gave rise to tax on disposals of chargeable assets, but instead by the exclusion from the group exemption of an intra-group disposal to a transferee which is outside the UK tax net but located in a member state. The FTT found that, since the UK had disproportionately restricted the freedom of establishment of JTIH by imposing an immediate tax liability on Gallaher in respect of the disposal of the shares, the most appropriate remedy was to disapply the charge.
Finally, the FTT observed that the 2011 disposal related to intellectual property rights and therefore concerned the freedom of movement of capital. It thought that this freedom could not be considered in the context of the 2011 disposal, taking into account the purpose of s 171 and existing CJEU case law. The only freedom relevant to s 171 was the freedom of establishment.
Why it matters: The FTT concluded: ‘I realise that my ultimate conclusion in relation to the 2014 disposal is counter-intuitive given that it is clear that, as a matter of EU law, the UK is entitled to impose tax on the gain which has accrued on the shares in Galleon prior to the intra-group disposal which led to the shares' leaving the UK tax net and the only disproportionality in the present restriction on the freedom of establishment to which the UK legislation gives rise is the timing of the tax liability. However, the reason for my conclusion lies in the finite scope of the doctrine of conforming interpretation, coupled with the imprecision which necessarily arises out of the disapplication which needs to be made in the present context. In that respect, it is similar to the conclusion ultimately drawn in Fleming to the effect that the offending regulation should be disapplied sine die, as opposed to being disapplied for a finite period which appeared to the House of Lords to be fair.’
The freedom of establishment and intra-group transfers
Our pick of this week's cases
In Gallaher v HMRC [2019] UKFTT 207 (25 March 2019), the FTT disapplied the charge to CGT on an intra-group transfer which did not fall within the scope of TCGA 1992 s 171, in breach of the principle of freedom of establishment.
Gallaher was a UK company and an indirectly wholly-owned UK resident subsidiary of JTIH, a company resident in the Netherlands, which held its interest in Gallaher through four wholly-owned UK resident subsidiaries. JTISA was a directly wholly-owned Swiss resident subsidiary of JTIH. The appeal related to two disposals by Gallaher. In 2011, it had sold intellectual property rights to JTISA and in 2014, it had sold all of the issued share capital in one of its subsidiaries to JTIH. The issue was whether the fact that Gallaher was unable to rely on TCGA 1992 s 171 to avoid the charge to CGT on both disposals (because both transferees were outside the UK tax net) was contrary to EU law.
In relation to the 2014 disposal, it was accepted that the fact that the disposal to JTIH triggered a liability, where none would have occurred, had JTIH been UK resident, was a restriction to the freedom of establishment, and the FTT rejected HMRC’s submission that the restriction was justified. The restriction was therefore unlawful and two remedies were available; a conforming interpretation of s 171 and the disapplication of the provision. The FTT considered that, even though the most appropriate option for a conforming interpretation of s 171 would be to amend the UK legislation to provide for an option to pay the tax by way of instalments, it was not equipped to decide ‘which of the vast array of possible instalment payment options should be selected’; any decision as to the precise basis on which deferred payment by way of instalments should be offered was a matter for Parliament.
It was also ‘not obvious’ how disapplication should work in circumstance where the infringement of EU law was caused not by the provisions of the UK legislation which gave rise to tax on disposals of chargeable assets, but instead by the exclusion from the group exemption of an intra-group disposal to a transferee which is outside the UK tax net but located in a member state. The FTT found that, since the UK had disproportionately restricted the freedom of establishment of JTIH by imposing an immediate tax liability on Gallaher in respect of the disposal of the shares, the most appropriate remedy was to disapply the charge.
Finally, the FTT observed that the 2011 disposal related to intellectual property rights and therefore concerned the freedom of movement of capital. It thought that this freedom could not be considered in the context of the 2011 disposal, taking into account the purpose of s 171 and existing CJEU case law. The only freedom relevant to s 171 was the freedom of establishment.
Why it matters: The FTT concluded: ‘I realise that my ultimate conclusion in relation to the 2014 disposal is counter-intuitive given that it is clear that, as a matter of EU law, the UK is entitled to impose tax on the gain which has accrued on the shares in Galleon prior to the intra-group disposal which led to the shares' leaving the UK tax net and the only disproportionality in the present restriction on the freedom of establishment to which the UK legislation gives rise is the timing of the tax liability. However, the reason for my conclusion lies in the finite scope of the doctrine of conforming interpretation, coupled with the imprecision which necessarily arises out of the disapplication which needs to be made in the present context. In that respect, it is similar to the conclusion ultimately drawn in Fleming to the effect that the offending regulation should be disapplied sine die, as opposed to being disapplied for a finite period which appeared to the House of Lords to be fair.’
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