 Incorporating an overseas branch
It was announced on 6 January 2009 that changes will be made to rules which are designed to prevent capital gains arising on the incorporation of a UK company’s overseas branch.
Companies often decide to incorporate activities carried on by their overseas branches by transferring the trade and assets to a company operating in the same territory as the branch. In these circumstances, section 140 Taxation of Chargeable Gains Act 1992 (TCGA) is designed to provide for the postponement of any gains arising where the transfer is wholly or partly in exchange for securities consisting of shares, or of shares and loan stock in the transferee company.
Under existing rules, the corporation tax charge on the gain is postponed until the earlier of:
a) the disposal of the securities in the transferee company, without time limit, or
b) a disposal of the assets on which gains have been postponed by the transferee within six years of the original transfer.
If a) occurs before b), section 140(4) currently brings a proportionate part of the postponed gain back into charge by treating the postponed chargeable gain as additional consideration for the disposal of those securities.
The rule in section 140(4) produces the intended outcome if any chargeable gain on the disposal of the securities is chargeable to corporation tax. However, where the securities are exempt from tax, then, as the rules are currently worded, the postponed gain never falls into charge.
One of the circumstances in which the securities would be exempt is where they are shares which qualify under the substantial shareholdings exemption (SSE). There is, therefore, a provision in the SSE rules (paragraph 35 schedule 7AC TCGA 1992) which deems a separate chargeable gain to accrue on the disposal of the exempt share, equal to the gain previously postponed.
Another situation where no chargeable gain currently arises is where the trade and assets are transferred in return for qualifying corporate bonds (QCBs) in the transferee company. A disposal of QCBs is exempt from tax under section 115 TCGA. As there is no other provision which brings the postponed gain back into charge, any gain that has been postponed under section 140 which should be brought into account by section 140(4) will also be exempt. HMRC realised that this was a problem after receiving a non-statutory business clearance which set out planning involving a transfer of trade in return for the issue of loan notes.
HMRC has announced that revised rules will be introduced in Finance Bill 2010, applying to disposals of securities on or after 6 January 2010. These rules will deem a separate chargeable gain, equal to the postponed gain (or a proportionate part), to accrue to the transferor company at the time of any disposal of the securities. Any postponed chargeable gain that is deemed to accrue is in addition to
any gain or loss that accrues to a transferor company on a disposal of the securities themselves.
The overriding provision in the SSE rules referred to above will be repealed as this will no longer be required. For more details see http://digbig.com/5bbdjn
|