Clause 51 - Chargeable gains
Finance Bill
4:00 pm
Richard Spring (Shadow Minister, Treasury; West Suffolk, Conservative)
I do not believe that the amendments are controversial, although they are somewhat technical in nature and are a tidying-up exercise. I beg your indulgence, Mr. Cook, to talk for a few minutes about the background to the proposals, in order to give the flavour of the amendments. I also want to outline what clauses 51 to 65 are all about.
The measures have been introduced to bring the European company, the Societas Europaea, into UK tax law and to facilitate corporate reorganisations involving SEs. They follow the publication of an Inland Revenue technical note of January 2005 and subsequent consultation on the clauses. The SEs shall effectively be subject, if UK tax resident, to the same tax law as other UK companies.
Based on recent European Court of Justice cases, some of the provisions, such as those that apply a tax regime where assets are transferred out of the UK different from that where they are transferred out of the EU, might be ruled illegal by the ECJ, often following action from the European Commission, which seeks to create a common corporation tax system across the EU.
There is professional disagreement about that , but arguably, instead of creating new tax legislation, the rules could have been fitted into existing UK reliefs. There are a number of areas where the rules could greater assist cross-border mergers, not least where there are no provisions to transfer tax losses to an SE on such a merger.
Representations were made on the consultative document, but the extra provision we are discussing was the only change that addressed any of the issues raised in the latest Finance Bill, that of 2005. Some of the issues raised in representations related to specific technical areas, but the major point of concern that has not been addressed in this Finance Bill relates, once again, to a continuing theme of our deliberations—the compatibility of the legislation with the EC Treaty.
Notwithstanding the fact that there is no requirement under the EU tax mergers directive for such transactions to be carried out on a tax neutral basis, we consider that the requirement to retain a permanent establishment in the relevant member state to ensure that the transactions are tax neutral might well be contrary to articles 43 and 48 of the EC Treaty, which relate to freedom of establishment. It might discourage an SE from undertaking those transactions that involve transferring its registered office between member states. We therefore consider that the additional clauses should have been drafted accordingly.
I will now discuss the amendments. At present, the reliefs in clauses 51 to 65 are intended to work in that they allow tax reliefs to apply when companies from separate member states merge. For example, when a German bank and an Italian bank merge into an SE, the merger of their London branches—permanent establishments, in the technical term—should be covered by the tax reliefs. However, the lines we propose to delete mean that mergers of two German banks into an SE, for instance, would not be exempt under the SE rules proposed in the Bill. That appears to be anomalous, albeit close to what the EU mergers directive requests. It is also likely to be contrary to EU law for the reasons already visited several times in the Committee.
Amendment No.148 is a paving amendment for the next one. Amendment No. 149 seeks to ensure that where an SE is formed by the merger of two companies, both resident within one member state and both of which have UK permanent establishments, there is no charge to tax on capital gain assets held by those UK permanent establishments and transferred to the SE; for example, there is no taxable disposal of their UK business premises when the two UK permanent establishments are merged. It allows more flexibility for EU companies to merge into an SE, without incurring an unnecessary UK tax charge.
It should be noted that there are a number of EU-resident companies that have UK premises that might perform such mergers; for example, a large proportion of those EU-resident companies are German, due to Germany's strength in the financial sector and German companies' involvement in the City of London. We also consider that this amendment and the following ones tie in with what the Chancellor said recently about making the EU rules for business more flexible.
Amendment No. 150 would remove a line that is unnecessary, as the conditions of proposed new section 140F(1)(d) to the Taxation of Chargeable Gains Act 1992 refer to a UK company merging into a non-UK company. Two existing UK companies cannot merge into each other, because there is no provision to do so under company law. Proposed new section 140F cannot apply if merging companies are not all resident in the same state anyway, and would have no purpose.
Amendment No. 151 addresses a situation where the SE issues shares to the shareholders of the merging companies as compensation for agreeing to the merger; typically, their shares in the pre-merger companies would then be cancelled. Such a merger under the relevant EU directive should qualify for such a relief, and there is no reason why UK shareholders should be denied the roll-over relief for shares in the SE just because the merging companies are based in the same member state. It should be remembered that two UK-resident companies are unlikely to undertake this because of the requirement that SEs must have worker representation on their boards.
Amendment No. 152 is similar to the previous amendments. It is intended to ensure that, where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on intangible assets that are held by those UK permanent establishments and transferred to the SE—for example, there is no taxable disposal of their UK customer lists when the two UK permanent establishments are merged.
Amendment No. 153 is also similar to the previous amendments. The line it seeks to leave out is unnecessary, as the clause cannot apply—by virtue of proposed new section 87A(l)(d), which relates to the situation where a UK company transfers assets to a company that is not resident in the UK—when the merging companies are resident in the same member state.
Similarly, amendment No. 154 seeks to ensure that where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on loan relationships held by those UK permanent establishments that are transferred to the SE; for example, there is no taxable disposal of their loans to UK customers, when the two UK permanent establishments are merged.
Amendment No. 156 is on a similar theme. It is designed to ensure that where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on financial derivatives held by those UK permanent establishments that are transferred to the SE; for example, there is no taxable disposal of their interest rate swaps on their UK borrowings when the two UK permanent establishments are merged.