This was a request for a preliminary ruling from the French Council of State relating to interpretation of Article 8 of the Merger Directive (Directive 90/434/EEC), in particular whether Article 8(2) precludes national legislation which establishes a mechanism to defer taxation of the capital gains arising when shares or securities are exchanged until such shares or securities are subsequently transferred.
The facts of the case concern a decision of the tax authorities to tax the capital gains arising out of an exchange of securities on the subsequent transfer of the securities received. In 1996 Mr Jacobs transferred securities he held in one French company to another. At his request, the taxation on the capital gain arising on the exchange of those securities was deferred pursuant to the French provisions in force. In October 2004, Mr Jacobs moved his residence for tax purposes to Belgium. In 2007 he transferred all of his securities in the second company. Following that transfer, the capital gain that was still subject to deferred taxation was taxed, together with default surcharge and a 10% surcharge. After an initial discharge of the taxes, an appeal by the Minister resulted in them being reinstated. Mr Jacobs then lodged a review with the Council of State, who requested the preliminary ruling.
The AG proposed that the court answer that Article 8(1) and (2) do not preclude a mechanism, which, in the event of an exchange of securities falling within the scope of that directive, defers taxation of the capital gain established on such an exchange until the subsequent transfer of those securities. The AG stated that the freedom of establishment prevents a Member State, in which the taxation of the capital gain on an exchange was deferred until the subsequent transfer of the securities exchanged, from taxing the gain at the time of that transfer without taking account of the capital losses arising after the exchange if such an advantage would be granted to a resident taxpayer. If national law provides a mechanism to defer taxation of a capital gain established on an exchange of securities falling with the scope of the Directive until the subsequent transfer of those securities, and if it provides for account to be taken of the capital losses arising after the exchange of securities for resident taxpayers, the Member State of origin must grant the same advantage to non-resident taxpayers.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
On 16 November the Commission published its preliminary decision, available here, that the group financing exemptions (GFE) within the UK’s CFC provisions (chapter 9 of Taxation (International and Other Provisions) Act 2010) constitute state aid. The Commission sees the reference system as the CFC provisions. In the Commission’s view the objective of the UK system
is to tax income artificially diverted from the UK which, in the case of non-trading financing income, meets the criteria within the chapter 5 gateway. The GFE acts as a derogation in that it exempts certain groups that fall within that gateway. It rejects the UK’s argument that the exemptions in chapter 9 are merely an additional filter forming part and parcel of the reference
system.
The Commission regards the GFE as selective because it is only available to non-trading financing income within the chapter 5 gateway which is derived from qualifying loan relationships, that is essentially loans to related companies that are not UK resident and not attributable to a UK PE. The comparator appears therefore to be a group with financing income where the loans are to the UK or a third party. The Commission does not regard it as consistent with the logic of the system to distinguish income which does not have the effect of creating a UK interest deduction from that which does. The partial exemption is additionally regarded as disproportionate.
No reference is made to Cadbury Schweppes or the principles it established even though that case also concerned financing income and the GFE requires the genuine establishment of the CFC.
The publication of the preliminary decision opens the 30 day period for interested parties to make submissions to the Commission.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
The new legislative announcements in the 2017 budget include:
Double Tax Relief
Regarding double tax relief, from 22 November 2017 the government will introduce a restriction to the relief for foreign tax incurred by an overseas branch of a company, where the company has already received relief overseas for the losses of the branch against profits other than those of the branch. The restriction aims to ensure that double tax relief is not granted for same losses. The Double Tax Relief Targeted Anti-Avoidance Rule will also be amended to remove the requirement for HMRC to issue a counteraction notice, and will extend the scope. Legislation will be introduced in Finance Bill 2017-18 to include a new section 71A in Part 2 of TIOPA 2010 to restrict the amount of credit allowed or deduction given for foreign tax where the company has received relief for losses against non-PE profits in the foreign jurisdiction.
The amount of double taxation relief available will instead be determined by reference to the amount of foreign tax suffered by the overseas PE, less the amount of the reduction in foreign tax which results from the PE’s losses being relieved against non-PE profits in a foreign jurisdiction in the same or earlier periods.
Tax Avoidance
The government also introduced new legislation to counter the effect of tax avoidance arrangements. The new legislation makes amendments to the double taxation relief targeted anti-avoidance rule (DTR TAAR) contained in Part 2 TIOPA 2010. The amendments make two changes to that legislation. The first change removes the requirement for HM Revenue and Customs to give a counteraction notice in order to apply the DTR TAAR and will have effect for returns with a filing date on or after 1 April 2018. The second change will extend the scope of one of the categories of prescribed schemes to which the TAAR applies to include tax payable by any connected persons. The second change will have effect for payments of foreign tax made on or after 22 November 2017.
Further, the government will remove the 6-year time limit within which companies must adjust for transactions that have reduced the value of shares being disposed of in a group company. This change will take effect for disposals of shares or securities in a company made on or after 22 November 2017.
Amendments will be made to the corporate interest restriction rules some of which will be treated as having effect from 1 April 2017 when the Corporate Interest Restriction rules commenced and remainder from 1 January 2018. Large businesses with the charge to CT which incur net interest expense and other financial costs (within the scope of CT) above £2m per annum will be affected.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
The case concerns the immediate taxation of capital gains of a non-resident PE of A Oy, a Finish company, that resulted from the transfer of the PE to a company (X), that was also non-resident in Finland, in the course of a transfer of assets. In return, A Oy received shares in X. A Oy was taxed on the capital gains resulting from that transaction for that tax year and the tax was collected in that tax year as well. A Oy brought proceedings before Finish courts arguing that the legislation at issue was an obstacle to the freedom of establishment, as in an equivalent national situation, taxation would not have taken place until the time of realisation of the capital gain, that is, until the disposal of the assets transferred.
The CJEU held that Article 49 TFEU (freedom of establishment) must be interpreted as precluding national legislation, such as that in these proceedings, which, where a resident company, in the course of a transfer of assets, transfers a non-resident PE to a company that is also non-resident, first, provides for the immediate taxation of the capital gains resulting from the transfer, and, second, does not allow deferred collection of the tax, whereas in an equivalent national situation such capital gains are not taxed until the disposal of the transferred assets, in so far as that legislation does not allow the deferred collection of the tax.
This article appears in the JHA November 2017 Tax Newsletter, which also features:
These are two joined cases, X BV concerning the application of the Dutch interest deduction limitation rule to prevent base erosion, and X NV concerning the non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary under the Dutch participation exemption.
The facts of the first case are as follows: X BV was part of a Swedish group and received a loan to acquire shares in an Italian company, which it had done by incorporating another Italian company (NewCo) to which it contributed capital. Under the Dutch interest deductibility rule, the interest paid by X BV to a related party, where the debt is connected with a capital contribution in a subsidiary, is non-deductible. However, the tax treatment of the same structure would have been different if the Italian NewCo would have been established in the Netherlands and part of a Dutch fiscal unity (or consolidated tax group), which is reserved for Dutch resident companies. If such a fiscal unity was possible, then the capital contributions would not have been recognized for tax purposes and the deductibility of the interest would have been allowed. The AG argued that such a rule constituted an infringement of the freedom of establishment.
The second case concerned a Dutch company, X NV, which was part of a fiscal unity regime in the Netherlands and which held shares in a UK subsidiary through another Dutch subsidiary. These shares were subsequently contributed to another UK subsidiary. The Dutch company incurred a currency loss on its contributed shares as a result of exchange rate fluctuations. The deduction of the currency loss was denied by the Dutch tax authorities. Such loss would have been deductible if X BV was allowed to form a fiscal unity with its UK subsidiary. The AG argued that the difference in treatment of the currency loss does not constitute an infringement of the freedom of establishment.
The Dutch Government announced several emergency legislation, in the event that the CJEU follows the AG’s Opinion in the first case, and which would have retrospective effect to the time and date of publication of the AG Opinion (25 October 2017).
This article appears in the JHA November 2017 Tax Newsletter, which also features:
The long awaited Judgment of BNM v MGN [2017] EWCA Civ 1767 has finally been handed down.
As we envisaged, the Court of Appeal have held that Master Gorder-Saker was wrong to have adjudged that “when applying the new test of proportionality, the court need not consider the amount of any additional liability separately from the base costs”.
Continue reading on the About Legal Costs blog.
The facts of the case concerned a certain type of motor vehicle finance agreement, called an “Agility Agreement”, under which the customer, having paid monthly instalments in exchange for using the vehicle for a specific period, had an option to purchase the vehicle in consideration for a “balloon” payment of approximately 40 per cent of the vehicle sale price, including the cost of financing. The issue is whether these are contracts for a supply of services (with VAT chargeable on each monthly instalment) or a supply of goods (VAT chargeable up front).
From an EU law perspective, this question turns on the interpretation of Article 14(2)(b) of the VAT Directive, which specifies that there is a supply of goods in the case of agreement where there is “the actual handling over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment” (emphasis added).
In its judgment the CJEU has given guidance to national court on the application of the above three-stage test: Article 14(2)(b) applies to leasing contracts with an option to purchase (i.e., an express ownership transfer clause) if it can be inferred from the financial terms of the contract that exercising the option appears to be “the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term”. This is obviously a matter for the national court to determine, but in reaching its decision the CJEU referred back to the analysis at paragraphs 50 to 53 of the Advocate General’s opinion, and observed that this might in particular be the case where the aggregate of the contractual instalments corresponded to the market value of the goods, including the cost of financing, and the customer would not be required to pay a substantial additional sum as a result of exercising the option.
It is highly likely therefore that the Court of Appeal will find the Agility Agreement to be a supply of services, but other cases will need to be considered on their own facts.
This article appears in the JHA October 2017 Tax Newsletter, which also features:
This case concerned whether the taxpayer was entitled to compound interest in addition to statutory interest on a simple basis with the repayment of overpaid VAT. It was accepted that statutory interest represented only 24% of the taxpayer’s actual time value loss from the overpayments. The two issues for the Supreme Court were:
The Supreme Court unanimously dismissed Littlewoods’ cross-appeal on the first issue. Like the lower courts it held that the correct reading of the VAT Act is that it excludes common law claims and although references are made to interest otherwise available these are clearly references to interest under other statutory provisions and not the common law. To decide otherwise would render the limitations in the VAT Act otherwise meaningless.
The court allowed HMRC’s appeal on the second issue, holding that the lower courts were wrong to construe the CJEU’s requirement of an “adequate indemnity” as meaning “complete reimbursement”. The Supreme Court construed the term as “reasonable redress”. They did so for three reasons:
This article appears in the JHA October 2017 Tax Newsletter, which also features:
With Revenue and Customs Brief 3 (2017) HMRC has announced a change in policy in the treatment of pension fund management services provided by regulated insurance companies. This means that insurers will no longer be allowed to treat their supplies of management services provided in connection with defined benefit pensions (which do not qualify as special investment funds or “SIFS”) as VAT – exempt insurance.
The CJEU found in 2014 that a pension fund which pooled investments from a number of occupational pension schemes qualified as a SIF and could benefit from a VAT exemption for fund management services (see Case C-464/12 ATP PensionService v Skatteministeriet). However, the case dealt with defined contribution pensions and not the VAT treatment of services supplied in connection with defined benefit pensions. According to the CJEU’s 2013 judgment in Case C-424/11 Wheels Common Investment Fund Trustees and Others v Commissioners for Her Majesty’s Revenue and Customs, defined benefit pensions fell outside the fund management exemption for VAT because the investment fund (which pools the assets of the scheme) was not a SIF. Following ATP PensionService, HMRC accepts that management services for funds which qualify as SIFs, with all their required characteristics, were and always have been VAT exempt. Those pension funds that do not have all those characteristics are not SIFs and are not within the scope of the exemption.
HMRC now consider that case law has finally settled in this area and there will be no further review of the EU rules until after Brexit. The new policy on non-SIF pension fund management will apply as of 1 January 2018.
This article appears in the JHA October 2017 Tax Newsletter, which also features:
Published in Litigation Funding Magazine, October 2017.
“The decision in RNB may well open the floodgates to a myriad of different ‘good reasons’ to depart from an approved costs budget.”
David Hill, costs lawyer at Joseph Hage Aaronson asks what will be a ‘good reason’ for departing from budgets.
Continue reading on the About Legal Costs blog.
