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Changes to implement EU Anti-Tax Avoidance Directive

13 July 2018

Draft Finance Bill 2018-19 includes changes to existing corporate tax rules from 1 January 2020 to implement the EU Anti-Tax Avoidance Directive (ATAD). The impact of Brexit on these provisions will need to be monitored, as the outcome of ongoing negotiations will determine what arrangements apply in relation to EU legislation once the UK has left the EU.


Corporate tax exit charges

When a company ceases to be resident in the UK it is subject to tax on any unrealised gains on any chargeable assets. A non-UK resident company trading in the UK is also treated as disposing of any chargeable assets at their market value when the assets are transferred abroad or they cease trading. Similar exit charges apply for intangible fixed assets.

Currently, s187 TCGA 1992 and ss860-862 CTA 2009 allow the exit charges to be postponed where the migrating company’s UK resident parent assumes the liability to pay the exit charges at a future date on the occurrence of certain events. These postponement provisions will be repealed.

The exit charge may also be postposed under an exit charge payment plan (ECPP) if certain conditions are satisfied in respect of migration of companies or transfers of assets to another EEA State. The rules will be amended so that they only apply to transfers to EU states or non EU states that are members of the EEA that have entered into agreement on the mutual collection of tax debt. Other changes include the replacement of the existing two payment options with a single method to provide for the exit charge to be paid in instalments over a maximum of five years.

For inward migrations, companies will be treated as acquiring chargeable assets or chargeable intangible assets at their market value where those assets have been subject to an exit charge in another EU Member State.

Notably, the ability to postpone a charge on transfer of assets to a non-UK tax resident company (rather than through migration of the company holding the assets) remains where the relevant criteria of s140 TCGA 1992 and s827 CTA 2009 are met.


Hybrid and other mismatches

The UK already has a set of rules intended to address mismatches in tax treatment within the UK or between the UK and another jurisdiction. These rules came into effect from 1 January 2017. Minor changes are required to the hybrid mismatch rules to ensure they fully align with ATAD. The changes include:

  • Specific provisions requiring the UK to counteract arrangements relating to permanent establishments (PEs) of a UK tax resident company recognised by the UK but not by the jurisdiction where the PE is situated.
  • The current exemption for regulatory capital will be removed from the definition of “Financial instrument” and replaced with a power to make regulations.

The hybrid and other mismatch provisions are complex and all groups should take steps to review their arrangements.


Controlled foreign companies (CFC) provisions

Legislation will also be drafted to implement changes to the CFC provisions to comply with ATAD: these will be effective from 1 January 2019. The changes will widen the definition of control to include interests held by non-UK resident associates or related parties. This may affect which companies are regarded as being CFCs, and therefore CFC disclosures will need to be revisited.

The CFC finance company rules will also be amended to exclude non-trade finance profits generated by UK significant people functions (SPFs). This is an important change: in practice it means that non-trading finance profits will only qualify for full or partial exemption if they consist of:

  • Capital invested from the UK,
  • Arrangements in lieu of dividends to the UK, or
  • Leases to UK resident companies.

A number of groups will currently be relying upon such an exemption for the non-trading finance profits of their CFCs. The position of these companies will need to be revisited. From a practical perspective, it would be worthwhile waiting for the European Commission’s decision on the ongoing State Aid investigation into this part of the UK CFC rules and then undertaking a comprehensive review at that time to assess the potential impact. The decision of the European Commission is expected to be known in late July, or failing that in September 2018.


Tax dispute resolution mechanisms in the EU

The Draft Finance Bill also includes enabling legislation to implement the EU Directive on tax dispute resolution mechanisms in the EU and other similar international agreements. Member States are required to implement the Directive by 30 June 2019. The Directive applies to complaints submitted on or after 1 July relating to profits earned in a tax year commencing on or after 1 January 2018.

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Draft Finance Bill 2018-19