Corporation tax – TCGA 1992 s171 – cross-border intragroup transfers

Wed 08 May 2019

A recent First tier Tribunal (FTT) decision in the case of Gallaher Limited has decided that the nil gain/nil loss treatment under TCGA s171 should apply to a transfer of shares from a UK group company to a Dutch group company, despite the Dutch company not being within the charge to UK corporation tax.

This is a significant case for UK tax purposes and is likely to be appealed as the conclusion will be significant for a number of cross border intra EU reorganisations, particularly in the light of Brexit.  Counsel for the appellant included Philip Baker QC.

It is a long transcript, but the main issues (and conclusions) are outlined in paras 1-53.

Please get in touch with a member of the Mazars international tax team if your business has incurred tax liabilities as a result of a cross border reorganisation on the assumption that TCGA 1992 s171 did not apply, for a further discussion.

Further details of the case and transactions concerned

In this case, the FTT considered whether the rules at s171 TCGA 1992 and ss775-776 CTA 2009 are contrary to the EU’s fundamental freedom of establishment on the basis that they only apply where the relevant assets are transferred to companies within the charge to UK corporation tax.

The relevant group structure for the case concerned the following. JTIH is a holding company resident in Netherlands which owns:

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

In 2011 Gallaher Limited transferred brands to JTISA for £2.4bn.  This created an immediate charge to UK tax under the intangible fixed asset regime. This is because CTA 2009 s775 and s776 (concerning tax neutral intragroup transfers) did not apply as the brands were transferred to a Swiss company not within the charge to UK corporation tax..  The FTT considered whether the restriction of ss775-776 to transfers to UK resident companies or companies with a UK permanent establishment was compliant with EU law. It held that the EU freedoms weren’t infringed as JTISA was in the same group as Gallaher Ltd and JTIH had exercised its freedom to establish JTISA 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).  The FTT considered whether TCGA 1992 s171 is compatible with the EU’s fundamental freedom of establishment, on the basis that it only applies where the transferor and transferee are within the charge to UK corporation tax.

In relation to the 2014 transaction the FTT decided that s171 was a restriction on the freedom of establishment of JTIH. It considered that a difference of treatment under s171 whether the transferee is or is not within the charge to UK corporation tax could be justified on the by overriding reasons of public interest. However,

a requirement for immediate payment of the resulting tax would be a disproportionate burden. As it was not up to the Courts to determine what would be a suitable mechanism for deferred payment (this was a matter for Parliament), the only remedy the FTT could apply was to say that TCGA s171 should apply as it would if the shares had been transferred to a UK company.