ATAD changes in Finance Bill 2018-19

Fri 17 Aug 2018

EU Member States must apply rules that comply with the EU’s anti tax avoidance directive (ATAD – EU 2016/1164) with effect from 1 January 2019.  There are five areas covered by ATAD:

• Corporate interest restriction rules;
• General anti-abuse rules;
• Anti-hybrid rules;
• Corporate exit tax rules;
• Controlled foreign company rules.

Whilst the UK has measures in all these areas, there are certain aspects that require change to comply with ATED. Changes are therefore required to UK legislation before the UK leaves the EU.  The Finance Bill published on 6 July 2018 included amendments in respect of two areas of change (exit charges and hybrid & other mismatches) that generally take effect from 1 January 2020, but not for the third area of change (controlled foreign companies) that takes effect from 1 January 2019.  The draft legislation for the changes to the CFC rules may be available this autumn.

The potential implications of these changes should be being given consideration now, to assess whether there is any appropriate action to be taken before the new rules take effect.

ATAD and corporate exit charges

Whilst the UK already has EU exit charge provisions, it is possible to permanently defer those charges in some cases. In addition there are currently two methods for calculating the deferral available – either the instalment or realisation basis (TMA 1970 Sch 3ZB paras 11-17).

Changes taking effect from 1 January 2020

• Certain provisions permitting permanent deferral of the exit charge (TCGA 1992 s.187, CTA 2009 s.860-862) will be removed.
• TMA 1970 Sch 3ZB setting out how tax due under an exit charge payment plan (ECPP) will be payable, will be amended. This will replace the current ‘simple instalment method’ and the ‘realisation method’ with a single system of deferral as set out in Article 5 of Council Directive (EU) 1164/2016. The revised provision allows for ECPP tax to be payable in instalments over a maximum of 5 years, unless certain circumstances occur reducing the period over which payment is due.
• Provision is made to ensure that where assets come within the charge to corporation tax (including corporation tax on chargeable gains) and the company is liable to pay an exit charge on those assets in an EU or EEA state based on the market value, then that value is used as the starting cost for computing any gain or loss on a subsequent realisation of the assets (new TCGA 1992 s.184J and CTA 2009 s.863A).

Those considering cross border reorganisations, perhaps as a result of Brexit, should be giving consideration to the potential implications of these changes. In the absence of any new provisions to limit charges arising on transfers of business or assets between the UK and the EU, it may be worth considering whether it is appropriate to effect that reorganisation before 1 January 2020 in order to take advantage of the current facility for indefinitely deferring CGT and intangible asset regime charges.

ATAD and hybrid & other mismatches

The UK’s hybrid & other mismatch rules have effect as from 1 January 2017. The UK considers these rules to meet or exceed the requirement for ATAD, except in respect of disregarded permanent establishments (PEs) and exemptions for certain regulatory capital.  Changes will take effect from 1 January 2020 for these two areas.  A further area – reverse hybrids – will be considered at a later date.

Disregarded permanent establishments.

• The current UK anti-hybrid rules do not capture payments to a PE by the UK head office of the company. This can potentially create deduction/non-inclusion mismatches where the territory in which the PE is based does not recognise it for tax purposes.  TIOPA 2010 s.259HA and s.259HC will be amended to include specific provisions in relation to disregarded permanent establishments (cases where a permanent establishment of a company is recognised by the jurisdiction where a company is resident, but not recognised by the jurisdiction where the permanent establishment is located).

Exemption of certain regulatory capital.

• The exemption for certain regulatory capital provided by TIOPA 2010 s.259N(3)(b) will be amended to enable regulations to be made which will take into account the specific requirements set out by Article 9(4) of ATAD.

Reverse hybrids

• While the UK introduced measures to deal with hybrid & other mismatches with effect from 1 January 2017, these did not take account of reverse hybrids. The ATAD was amended in 2017 to take account of reverse hybrids (see EU Directive 2017/952).  It must be applied from 1 January 2022, and the UK will consider amending legislation for this in due course.  The reverse hybrid measure requires that where a hybrid entity is incorporated in a member state and owned by non-residents (to the extent of a 50% interest or more), if the non-resident’s jurisdiction regards the hybrid as a taxable entity, the Member State must treat the hybrid as a taxable resident entity to the extent that its results are not taxed in the non-resident’s jurisdiction.

Consideration should be being given to the impact of these new provisions, to see if there is any action to take prior to 1 January 2020 (or 2022).

ATAD and controlled foreign companies (CFCs)

The UK CFC rules currently determine control by reference to rights of connected UK resident persons, with ‘connected’ being assessed by reference to control. ATAD requires attribution of rights by reference to associated enterprises (a 25% test) resident in any territory.

• The UK CFC test for control will be amended to comply with ATAD with effect from 1 January 2019.

The UK CFC rules currently bring into account finance profits of a CFC where significant people functions (SPFs) in relation to those finance profits are carried on in the UK (chapter 5 part 9A TIOPA 2010 in relation to non-trade finance profits). However, these rules may not apply if the conditions in chapter 9 part 9A TIOPA 2010 are met.  This is not in accordance with ATAD.

• In order to comply with ATAD, the UK CFC rules will be amended from 1 January 2019 so that non-trade finance profits which fall within the scope of Chapter 5 by virtue of UK SPFs will no longer qualify for consideration under the CFC finance company rules in Chapter 9.

These changes will widen the range of controlled foreign companies caught by the UK CFC rules. Groups with CFCs affected by these changes should be assessing what action is required in response before 1 January 2019.