The European Commission issued the following press release today.

 "The European Commission has formally requested the United Kingdom to amend two discriminatory anti-abuse tax regimes which concern the transfer of assets abroad and attribution of gains to members of non-UK resident companies. The requests take the form of Reasoned Opinions (the second step of an infringement procedure). In the absence of a satisfactory response within two months, the Commission may refer the UK to the European Court of Justice.

The first infringement relates to the UK's “transfer of assets abroad” legislation. Under this legislation, if a UK resident individual invests in a company by transferring assets to it, and if this company is incorporated and managed in another Member State, then the investor is subject to tax on the income generated by the company to which he/she contributed the assets. However, if the same individual invested the same assets in a UK company, only the company itself would be liable for tax.

The second infringement relates to the attribution gains to member of non-UK resident companies regime. Under this legislation, if a UK-resident company acquires more than a 10% share of a company in another Member State, and the latter company realises capital gains from the sale of an asset, the gains are immediately attributed to the UK company, which becomes liable for corporation tax on these capital gains. If, on the other hand, the UK company had invested in another UK resident company, only the latter would be taxable on its capital gains.

In both cases, the Commission considers there to be discrimination, seeing as investments outside the UK are taxed more heavily than domestic investments. The difference in tax treatment between domestic and cross-border transactions restricts two fundamental principles of the EU's Single Market, namely of the freedom of establishment and the free movement of capital contrary to Articles 49 and 63 of the Treaty on the Functioning of the European Union (TFEU) and Articles 31 and 40 of the EEA Agreement.

The Commission is of the opinion that both restrictions are disproportionate, in the sense that they go beyond what is reasonably necessary in order to prevent abuse or tax avoidance and any other requirements of public interest."

Commentary

Many commentators have often thought these provisions were contrary to the freedom of movement of capital.  The rub is any changes that may be made to this legislation (assuming the UK accepts that the EU is correct) are likely to only affect investment in EU countries which would not include the Crown Dependencies or British Overseas Territories. Nonetheless this is a very interesting development especially at a time that the UK are changing the Controlled Foreign Company rules to relax investment made overseas in a bid to encourage multinationals to retain their heaedquarters in the UK.