CJEU: EU law no barrier to UK tax charge on intra-group transfers

In its last referral to the Court of Justice of the EU (CJEU) before the end of the Brexit transition period, the Upper Tribunal asked the CJEU to provide a preliminary ruling on two transactions within the Gallaher group. The first, in 2011, involved the transfer of intellectual property from a UK subsidiary to a Swiss sister company. The second, in 2014, involved the transfer of shares from a UK subsidiary to its Dutch parent company. Both transactions occurred while the UK was still an EU member state.

All parties were agreed that the UK group transfer rules – within the intangible fixed assets regime and capital gains regime respectively – gave rise to an immediate tax charge on both transactions when read on their own. The question for the CJEU was whether there was anything in the EU freedoms that Gallaher could rely on to prevent or defer the tax charge.

Two freedoms were considered: the free movement of capital under Article 63 of the Treaty on the Functioning of the EU (TFEU), which can extend to countries outside the EU, including Switzerland, and the freedom of establishment under Article 49 of TFEU, which applies only to countries within the EU.

The CJEU applied the established principle that where two potential freedoms apply to a transaction, the CJEU will examine the measure in dispute by reference to only one of those freedoms where the other freedom is “entirely secondary”.

The CJEU found that the free movement of capital principle was entirely secondary to the freedom of establishment in the context of these transactions because the legislation was clearly aimed at intra-group situations rather than portfolio investment.

Gallaher had also argued that even if the free movement of capital couldn’t generally apply, it could be brought into application in relation to the Swiss transaction because the freedom of establishment could not apply to transactions involving third countries. The CJEU found that it could not interpret Article 63 in such a way so as to enable a situation which should be analysed in the context of the freedom of establishment to be assessed on an Article 63 basis just because of the involvement of a third country. This finding was in alignment with earlier decisions of the CJEU.

With regards to the 2011 transaction, the CJEU therefore had to consider restriction from the perspective of the Dutch parent only. It concluded that there was no restriction on the freedom of establishment since the UK rules would have treated the transaction in exactly the same way even if the Dutch parent had been resident in the UK.

For the 2014 transaction, the parties had accepted that the freedom of establishment applied and that there was a restriction on it because a UK-to-UK transfer would have operated on a no gain no loss basis. It was also accepted that the difference in treatment was justified because it contributed to the balanced allocation of taxing powers between EU member states, allowing in this case the UK to recover the tax on the assets during their period within the UK’s jurisdiction. The only issue for the CJEU was therefore whether the UK legislation was proportionate.

Gallaher had argued that the absence of a deferral mechanism that allowed them to pay the tax over a longer period rendered that justification disproportionate, but the CJEU disagreed. It recognised that this could well be the case in relation to unrealised gains but found in this case that the UK company had realised its gain and received remuneration for the transfer and was therefore in funds to pay the tax. The fact the gain was realised enabled the CJEU to distinguish the facts of the Gallaher case from EU case law on exit charges which generally requires that there should be a deferral mechanism. It also highlighted that the risk of non-payment to the UK would increase over time if the tax was deferred.

Jake Landman of Pinsent Masons said: “This decision will be of particular interest to multinational groups which have made similar transfers. There will be appeals of assessments of a similar nature, which have been awaiting the outcome of this decision before being ruled on. Action from HMRC to resolve these appeals is likely to follow.”

“What remains to be seen is what happens now. Following the first-tier tax tribunal decision in this case, which had concluded that HMRC could not collect any tax at all on the 2014 transaction due to the inability to read into the legislation a compliant deferral mechanism, a change in law was introduced to provide for a deferral mechanism from 11 July 2019,” he said.

“Although the Retained EU Law (Revocation and Reform) Bill explicitly does not deal with tax law, the UK government has said that any tax changes to retained EU law are to be made via a Finance Bill or associated subordinate legislation. The government have not yet made any indications as to which elements of UK tax law it will change.”