European Union asks the UK to change two pieces of tax legislation on asset transfer to non UK resident firms

The European Union has told the U.K. to amend two pieces of tax legislation on the transfer of assets to non-U.K. resident companies or risk further action to force compliance. The European Commission warned the UK that if steps are not taken to amend the legislation it termed “discriminatory,” then the commission will be forced to take it to the European Court of Justice.

According to the Commission, the legislations are out of line with the principles of the E.U. single market, since investments outside the U.K. are more heavily taxed than domestic investments. The Commission established that one legislation, related to the UK’s “transfer of assets abroad” under which a UK resident who invests in a company incorporated in another E.U. member state by transferring assets to it is then subject to tax on the income generated by the company, was an infringement.

However, if the same individual invested the same assets in a U.K. company, only the company itself would be liable for tax. The Commission took issue with the second piece of legislation under which if a U.K. company acquires more than a 10 per cent share of a company in another E.U. country, and the latter company realizes capital gains from the sale of an asset, the gains are immediately attributed to the U.K. company, which becomes liable for corporation tax on these capital gains.

However, if on the other hand, the U.K. Company had invested in another U.K. resident company, only the latter would be taxable on its capital gains. The Commission has argued it believes both legislations are inconsistent and unnecessarily rigid in the prevention of tax abuse or tax avoidance. The Commission has given the UK two months to make a response before proceeding with the investigations to the next level.

Under current UK laws, a UK resident company is liable to UK corporation tax on its worldwide profits. A non-UK resident company is liable to UK corporation tax on the profits of a trade carried on by it through a branch or agency in the UK. A non-UK resident company which carries on a trade in the UK otherwise than through a permanent establishment is liable to UK income tax rather than corporation tax on the profits attributable to that trade.

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