Judges M Safjan, N Piçarra, N Jääskinen (Rapporteur), M Gavalec
Advocate General A Rantos
The taxpayer, a United Kingdom-resident company in a global tobacco group, was the indirect subsidiary of a Netherlands company, which also had a Swiss subsidiary, the taxpayer’s sister company. In 2011 the taxpayer disposed of intellectual property rights relating to tobacco brands and related assets to its Swiss sister company for consideration (“the 2011 disposal”). In 2014 the taxpayer sold all of the share capital in one of its subsidiaries to its Netherlands parent company for consideration (“the 2014 disposal”). The Revenue and Customs Commissioners (“the revenue”) adopted two partial closure notices concerning the disposals of assets, determining the amount of the chargeable gains and profits that accrued to the taxpayer in the relevant accounting periods. Pursuant to United Kingdom legislation, namely section 171 of the Taxation of Chargeable Gains Act 1992 and sections 775 and 776 of the Corporation Tax Act 2009 (collectively the “group transfer rules”), the capital gains on the assets were the subject of an immediate tax charge, with no right to defer payment, since the assignees were not resident for tax purposes in the United Kingdom. The taxpayer lodged two appeals against the revenue’s notices before the First-tier Tribunal (Tax Chamber) on the ground that the tax was charged contrary to European Union law since, if the assets had been transferred to a United Kingdom-resident parent or sister, there would have been no tax charge. The tribunal dismissed the appeal in relation to the 2011 disposal on the ground that there was no restriction on the parent company’s freedom of establishment under article 49 of the FEU Treaty (“TFEU”) and that the right to free movement of capital under article 63 TFEU could not be relied upon because the group transfer rules applied only to groups consisting of companies under common control. However, the tribunal allowed the taxpayer’s appeal in relation to the 2014 disposal on the ground that there was a restriction on the Netherlands parent’s freedom of establishment, that that company was objectively comparable to a company within the scope of United Kingdom tax and that the absence of a right to defer payment of the tax was disproportionate. Both the taxpayer and the revenue appealed to the Upper Tribunal (Tax and Chancery Chamber) which stayed the proceedings and referred to the Court of Justice of the European Union the questions, inter alia: (i) whether the national legislation fell within the scope of article 63 TFEU; (ii) whether the national legislation constituted a restriction on the freedom of establishment of the parent company under article 49 TFEU; and (iii) if there was such a restriction, whether that restriction was necessary and proportionate in circumstances where the taxpayer had obtained consideration for the disposal of the assets equal to the full market value of those assets.
On the reference—
Held, (1) the United Kingdom group transfer rules related to the tax treatment of disposals of assets within the same group of companies. Further, those rules applied only to disposals of assets between a parent company and the subsidiaries (or sub-subsidiaries) over which it exerted definite influence and to disposals of assets between sister subsidiaries (or sub-subsidiaries) which had a common parent company exercising definite influence on them. In both scenarios, the group transfer rules thus seemed to apply because of the parent company’s holding in the capital of its subsidiaries, which allowed it to exert definite influence over them. Any restrictive effects on the free movement of capital caused by the national rules would be the unavoidable consequence of an obstacle to freedom of establishment, and did not justify an independent examination of the rules from the point of view of the free movement of capital under article 63 TFEU. Accordingly, national legislation, such as the group transfer rules, which applied only to groups of companies, fell predominantly within the scope of article 49 TFEU, and was outside the scope of article 63 TFEU (paras 58–62, 66, operative part, para 1).
(2) National legislation, such as the group transfer rules in issue, did not entail any difference in treatment according to the place of tax residence of the parent company, since it treated a United Kingdom-resident subsidiary of a parent company having its seat in another member state in the same way as if the parent had its seat in the United Kingdom. Therefore, in the present case, the taxpayer would have received the same tax treatment if the Netherlands parent company had its tax residence in the United Kingdom. It followed that such national legislation did not treat a subsidiary of a member state-resident company less favourably than a comparable subsidiary of a United Kingdom-resident company, and therefore it did not entail any restriction on the freedom of establishment of the parent company. Accordingly, national legislation such as the group transfer rules did not constitute a restriction on the freedom of establishment, within the meaning of article 49 TFEU, of the parent company, in circumstances where such a disposal would be made on a tax-neutral basis if the sister company were also resident in the member state making the disposal of assets, or carried on a trade there through a permanent establishment (paras 72–74, 78, operative part, para 2).
(3) It was common ground that the group transfer rules constituted a restriction on freedom of establishment in relation to the 2014 disposal. However, that restriction could be justified by the need to maintain the balanced allocation of the power to impose taxes between the member states, on condition that the legislation and the restriction thereunder did not go beyond what was necessary to attain that objective. It followed that the issue in the present case was whether, under the group transfer rules, the immediate chargeability of the tax with no right to defer payment, was proportionate by reference to that objective. Since the taxpayer received consideration corresponding to the market value of the assets disposed, the capital gains tax chargeable to the taxpayer corresponded to the capital gains realised. Thus, an immediately recoverable tax charge with no right to defer payment appeared proportionate to the objective of maintaining a balanced allocation of the power to impose taxes between the member states, where: (a) the capital gains were realised at the time of the taxable event, (b) the tax authorities could ensure that the tax on those capital gains was paid, and (c) the risk the tax would not be paid could increase with the passage of time. Accordingly, a restriction on the right to freedom of establishment under article 49 TFEU resulting from the difference in treatment between national and cross-border disposals of assets for consideration within a group of companies under national legislation such as the group transfer rules could, in principle, be justified where the taxpayer concerned had obtained consideration in an amount equal to the full market value of those assets (paras 82, 83, 86–88, 90, 92–94, operative part, para 3).
Philip Baker QC and Imran Afzal (instructed by Freshfields Bruckhaus Deringer LLP) for the taxpayer.
Rupert Baldry QC and Ben Elliott (instructed by Treasury Solicitor) for the United Kingdom Government.
P-J Loewenthal and W Roels, agents, for the European Commission.