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EC threatens UK with legal action over discriminatory tax

The EC is threatening to take the UK government to court if it does not amend two tax laws.

EC threatens UK with legal action over discriminatory tax

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The Commission made its formal request to the UK in relation to the two laws, which concern the transfer of assets abroad and the attribution of gains to non-UK resident companies, earlier this week, and said if it did not receive a satisfactory response within two months it may refer the UK to the European Court of Justice.

The first infringement noted by the Commission 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 they contributed the assets. However, the Commission said 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 UK’s “attribution of gains to members of non-UK resident companies regime”. The Commission said 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 then becomes liable for corporation tax on these capital gains. In contrast however, if 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 said it considers there to be discrimination against those investing outside of the UK, with investments taxed more heavily than domestic investments.

It said 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”.

The Commission added that it believes in both cases the restrictions applied by the UK 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”.

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