Can UK nil/gain nil loss taxation of intragroup transfers (normally only available for asset transfers within the UK), apply to cross border transfers?

Wed 03 Apr 2019

A recent First tier Tribunal (FTT) decision in the case of Gallaher Limited has decided that TCGA s171 should apply to a transfer of shares from a UK group company to a Dutch group company – without any requirement for deferred payment of UK tax on the transfer.

This is a significant case for UK tax purposes and may well be appealed, as its outcome could be significant for a number of cross border intra EU reorganisations, particularly in the light of Brexit.  An alternative view to the one taken by the FTT might be that postposed payment requirements should apply, but that will depend on any appeal and the views of any superior court in the event of an appeal.

There is further detail on the case below, but to discuss the tax issues of reorganisations concerning cross border transactions, please get in touch with a member of the Mazars international tax or corporate tax teams.

Further details of the case and transactions concerned

JTIH is a holding company resident in Netherlands which owns (i) JTI(UK) Management (JTIUM)– a holding company resident in the UK and (ii) JTISA – a company resident in Geneva Switzerland – that manages the group’s brands.  JTIUM owns Gallaher Limited indirectly through a series of other group companies.

In 2011 Gallaher Limited transferred brands to JTISA for £2.4bn.  This created an immediate charge to UK tax as a result of CTA 2009 s775 and s776 (concerning tax neutral intragroup transfers) not applying as the brands were not chargeable intangible assets immediately after the transfer.  The FTT considered whether this compliant with EU law and held that the EU freedoms weren’t infringed as JTISA was in the same group and JTIH had exercised its freedom to establish JTSA in Switzerland.  In any case there had been no movement of capital to JTISA in the transfer of brands for consideration.

In 2014 Gallaher Limited transferred shares in an Isle of Man insurance subsidiary (Galleon) to JTIH for around £2m, giving a £1.5m gain (there is no discussion as to why TCGA Sch7AC – substantial shareholding exemption – did not apply).  As TCGA 1992 s171 only applies where the transferor and transferee are within the charge to UK tax, and JTIH was within the charge to tax in the Netherlands, the FTT considered whether this was in accordance with EU law.

In relation to the 2014 transaction the FTT decided that s171 was a restriction on the freedom of establishment of JTIH, but balanced allocation of taxing powers could override this. A requirement for immediate payment was however disproportionate and it was not up to the Courts to determine what would be a suitable mechanism for deferred payment (this was a matter for Parliament).  Therefore the only remedy the FTT could apply was to say that TCGA s171 should apply.