Clause 51 - Chargeable gains

Finance Bill – in a Public Bill Committee am 4:00 pm ar 30 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Richard Spring Richard Spring Shadow Minister, Treasury 4:00, 30 Mehefin 2005

I beg to move amendment No. 148, in clause 51, page 42, line 12, after 'State', insert 'and'.

Photo of Frank Cook Frank Cook Llafur, Stockton North

With this it will be convenient to discuss the following amendments:

No. 149, in clause 51, page 42, leave out lines 13 and 14.

No. 150, in clause 51, page 43, leave out line 18.

No. 151, in clause 51, page 43, leave out line 45.

No. 152, in clause 52, page 44, leave out line 21.

No. 153, in clause 53, page 45, leave out line 20.

No. 154, in clause 54, page 46, leave out line 34.

No. 156, in clause 55, page 48, leave out line 2.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I do not believe that the amendments are controversial, although they are somewhat technical in nature and are a tidying-up exercise. I beg your indulgence, Mr. Cook, to talk for a few minutes about the background to the proposals, in order to give the flavour of the amendments. I also want to outline what clauses 51 to 65 are all about.

The measures have been introduced to bring the European company, the Societas Europaea, into UK tax law and to facilitate corporate reorganisations involving SEs. They follow the publication of an Inland Revenue technical note of January 2005 and subsequent consultation on the clauses. The SEs shall effectively be subject, if UK tax resident, to the same tax law as other UK companies.

Based on recent European Court of Justice cases, some of the provisions, such as those that apply a tax regime where assets are transferred out of the UK different from that where they are transferred out of the EU, might be ruled illegal by the ECJ, often following action from the European Commission, which seeks to create a common corporation tax system across the EU.

There is professional disagreement about that , but arguably, instead of creating new tax legislation, the rules could have been fitted into existing UK reliefs. There are a number of areas where the rules could   greater assist cross-border mergers, not least where there are no provisions to transfer tax losses to an SE on such a merger.

Representations were made on the consultative document, but the extra provision we are discussing was the only change that addressed any of the issues raised in the latest Finance Bill, that of 2005. Some of the issues raised in representations related to specific technical areas, but the major point of concern that has not been addressed in this Finance Bill relates, once again, to a continuing theme of our deliberations—the compatibility of the legislation with the EC Treaty.

Notwithstanding the fact that there is no requirement under the EU tax mergers directive for such transactions to be carried out on a tax neutral basis, we consider that the requirement to retain a permanent establishment in the relevant member state to ensure that the transactions are tax neutral might well be contrary to articles 43 and 48 of the EC Treaty, which relate to freedom of establishment. It might discourage an SE from undertaking those transactions that involve transferring its registered office between member states. We therefore consider that the additional clauses should have been drafted accordingly.

I will now discuss the amendments. At present, the reliefs in clauses 51 to 65 are intended to work in that they allow tax reliefs to apply when companies from separate member states merge. For example, when a German bank and an Italian bank merge into an SE, the merger of their London branches—permanent establishments, in the technical term—should be covered by the tax reliefs. However, the lines we propose to delete mean that mergers of two German banks into an SE, for instance, would not be exempt under the SE rules proposed in the Bill. That appears to be anomalous, albeit close to what the EU mergers directive requests. It is also likely to be contrary to EU law for the reasons already visited several times in the Committee.

Amendment No.148 is a paving amendment for the next one. Amendment No. 149 seeks to ensure that where an SE is formed by the merger of two companies, both resident within one member state and both of which have UK permanent establishments, there is no charge to tax on capital gain assets held by those UK permanent establishments and transferred to the SE; for example, there is no taxable disposal of their UK business premises when the two UK permanent establishments are merged. It allows more flexibility for EU companies to merge into an SE, without incurring an unnecessary UK tax charge.

It should be noted that there are a number of EU-resident companies that have UK premises that might perform such mergers; for example, a large proportion of those EU-resident companies are German, due to Germany's strength in the financial sector and German companies' involvement in the City of London. We also consider that this amendment and the following   ones tie in with what the Chancellor said recently about making the EU rules for business more flexible.

Amendment No. 150 would remove a line that is unnecessary, as the conditions of proposed new section 140F(1)(d) to the Taxation of Chargeable Gains Act 1992 refer to a UK company merging into a non-UK company. Two existing UK companies cannot merge into each other, because there is no provision to do so under company law. Proposed new section 140F cannot apply if merging companies are not all resident in the same state anyway, and would have no purpose.

Amendment No. 151 addresses a situation where the SE issues shares to the shareholders of the merging companies as compensation for agreeing to the merger; typically, their shares in the pre-merger companies would then be cancelled. Such a merger under the relevant EU directive should qualify for such a relief, and there is no reason why UK shareholders should be denied the roll-over relief for shares in the SE just because the merging companies are based in the same member state. It should be remembered that two UK-resident companies are unlikely to undertake this because of the requirement that SEs must have worker representation on their boards.

Amendment No. 152 is similar to the previous amendments. It is intended to ensure that, where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on intangible assets that are held by those UK permanent establishments and transferred to the SE—for example, there is no taxable disposal of their UK customer lists when the two UK permanent establishments are merged.

Amendment No. 153 is also similar to the previous amendments. The line it seeks to leave out is unnecessary, as the clause cannot apply—by virtue of proposed new section 87A(l)(d), which relates to the situation where a UK company transfers assets to a company that is not resident in the UK—when the merging companies are resident in the same member state.

Similarly, amendment No. 154 seeks to ensure that where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on loan relationships held by those UK permanent establishments that are transferred to the SE; for example, there is no taxable disposal of their loans to UK customers, when the two UK permanent establishments are merged.

Amendment No. 156 is on a similar theme. It is designed to ensure that where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on financial derivatives held by those UK permanent establishments that are transferred to the SE; for example, there is no taxable disposal of their interest rate swaps on their UK borrowings when the two UK permanent establishments are merged.  

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 4:15, 30 Mehefin 2005

Will the Minister clarify one point? Why do the Government allow transactions under these provisions to benefit from the formal and legally binding advance clearance system established in clause 51, in respect of whether there was a main purpose of tax avoidance in using the provisions, while refusing to extend such a mechanism, despite taxpayers' desire for this, for the new tax arbitrage regime? Can the Minister reconcile that with the Paymaster General's comment last week, when she was asked to introduce a pre-clearance mechanism in respect of arbitrage rules? She said:

''By adopting an informal process, which works well for other anti-avoidance measures, companies are provided with the flexible system that they want, under which they will not feel obliged or pressured to seek formal clearance in every case, with all the costly bureaucracy and fees that go with ensuring that their approach is agreed. Instead, they need only ask for assistance when they are uncertain of the operation or application of the rules . . . If there is a statutory regime for clearance where even schemes that do not need it, because they are perfectly straightforward and no dispute is involved, go into that system and resources are consumed, the choice is a longer delay or not to do something else in the tax system.''—[Official Report, 23 June 2005; Vol. 435, c. 149–150]

Photo of John Healey John Healey The Financial Secretary to the Treasury

This group of amendments relates to clauses that introduce provisions relating to the new European company created by regulation EC/2157/2001, known as the European company statute.

I shall discuss the amendments rather in the way that the hon. Member for West Suffolk (Mr. Spring) did, because such a discussion opens a wider debate. The amendments cover clauses 51 to 55. It may help the Committee if I take a few moments to explain the background. That will, however, mean that I will have little or nothing to say by way of explanation on some of the other clauses.

The ECS, the European company statute, came into effect on 8 October 2004. It creates a legal framework for a new form of company: the European company—the ''Societas Europaea''—or SE. I am told that that is a Latin name, although my ability to decline Latin stopped after I said ''Bellum, bellum, bellum''—just to pick up the earlier military analogy.

The ECS regulation sets out the company law framework for SEs and the accompanying directive specifies that the employee involvement arrangements that apply to an SE mean that neither the regulation nor the employee involvement directive mention tax. The ECS permits the formation of an SE by various mechanisms, including a merger between two or more companies in different member states into an SE. The Department of Trade and Industry has issued the regulations enabling the formation of SEs, including formation by merger, in UK company law. For most UK tax purposes an SE based in the UK will be treated like a UK plc and will fit into the existing corporation tax regime and the other regimes relating to UK companies. That, in short, is the answer to the question by the hon. Member for Braintree (Mr. Newmark).

The issue for direct tax relates to the formation of SEs by cross-border merger in a prescribed form. Such a transaction was not previously possible in UK company law. Tax rules also have to take account of   tax-specific EU legislation—the mergers directive—which I think the hon. Member for West Suffolk mentioned. The broad effect of the mergers directive is that the formation of an SE by merger should be tax neutral. The purpose of clauses 51 to 65 is to amend the UK chargeable gains, intangible assets, loan relationships and derivative contracts regimes broadly to ensure tax neutrality in the event of a merger to form an SE.

The amendments would affect clauses 51 to 55, which stipulate that the provisions apply only where three conditions are met. First, an SE is formed by the merger of two or more companies in accordance with the articles of the European company statute. Secondly, each company is resident in a member state. Thirdly, the merging companies are not all resident in the same member state.

Amendment No. 148 and a number of the others in the group seek to remove that third requirement. The removal of the requirement that not all companies involved in the merger should be resident in the same member state, would not be, as the hon. Gentleman suggested, simply a tidying-up exercise, but contrary to the purpose of the legislation and to EU law.

First, the ECS can apply only to mergers involving companies from more than one member state. Secondly, the mergers directive requires that the tax neutrality provided for in the directive can apply only to transactions involving companies from more than one member state. Furthermore, the directive requires, in effect, that those companies should be tax resident in different states. It is important to make those legal requirements clear to companies.

Finally, the hon. Gentleman raised a question about compatibility with treaties. The Government are confident that the provisions do not contravene the EU treaty. They are consistent with the ECS and the merger directive and ensure that a UK company's decision to merge with a company in another member state to form an SE is neither disadvantaged nor driven by tax considerations.

I hope that, on that basis, the hon. Gentleman will not press the amendments to a Division. If he does, I shall have to ask my hon. Friends to resist them.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I reassure the Minister that, as I indicated at the start, I do not propose to press the amendments any further. I am reassured by the fact that he believes that what is before us is compatible with EU law inasmuch as it may in future be tested. The simple point of the amendments was to create more flexibility but nevertheless, in our judgment and that of professionals outside, not be inconsistent with the EU legislation that created those SEs.

This matter is highly technical and we shall endeavour to listen carefully to those who have given us the advice that forms the basis of the amendments. If there is still disagreement on the issue, I hope that the Minister will permit me to correspond with him about it. I do not wish to detain the Committee further, and I beg to ask leave to withdraw the amendment.  

Amendment, by leave, withdrawn.

Clause 51 ordered to stand part of the Bill.

Clauses 52 and 53 ordered to stand part of the Bill.