Chapter 3: Surrendersmade by non-UK resident company resident or trading in the EEA
Overview
406.This Chapter makes the United Kingdom group relief rules compatible with European Community law following the judgment in Marks and Spencer plc v Halsey, C446/03(1). That case decided that in some circumstances it is contrary to the provisions of the EC Treaty on freedom of establishment to deny group relief to a UK resident parent for the losses of a non-UK resident subsidiary.
407.So this Chapter allows relief for foreign losses. But there are two main restrictions:
the surrendering company must be resident in (or otherwise “related” to) an EEA territory; and
the losses must not qualify for relief in the EEA territory.
Section 111: Overview of Chapter
408.This section sets out the structure of the Chapter. It is new.
Section 112: EEA related definitions
409.This section defines the expressions that are used in the Chapter to describe the connection of companies and their profits to the EEA. It is based on section 402 of, and Schedule 18A to, ICTA. The EEA comprises:
| Austria | Greece | Netherlands |
| Belgium | Hungary | Norway |
| Bulgaria | Iceland | Poland |
| Cyprus | Ireland | Portugal |
| Czech Republic | Italy | Romania |
| Denmark | Latvia | Slovak Republic |
| Estonia | Liechtenstein | Slovenia |
| Finland | Lithuania | Spain |
| France | Luxembourg | Sweden |
| Germany | Malta | United Kingdom |
Section 113: Steps to determine extent to which loss etc can be surrendered
410.This section sets out how to calculate how much of an “EEA amount” may be surrendered. It is based on section 403F of, and paragraph 11 of Schedule 18A to, ICTA.
411.Subsection (2) is a method statement.
412.Step 1 eliminates any amount that is within the United Kingdom tax net and available for surrender under the rules in Chapter 2.
413.Step 2 sets out the conditions that the EEA amount has to meet. The detail of the conditions is set out in sections 114 to 121. To the extent that the EEA amount meets these conditions it is the “qualifying part of the EEA amount”.
414.Step 3 requires the EEA amount to be recalculated using United Kingdom tax rules and the assumptions set out in sections 123 to 126.
415.In paragraph 11(4) of Schedule 18A to ICTA the assumptions are made in relation to “the provisions of this Chapter” (that is, Chapter 4 of Part 10 of ICTA). In fact the assumptions are used only for the purpose of recalculating the EEA amount. So in this Act they apply only for that restricted purpose.
416.Step 4 compares the qualifying part of the EEA amount with the same proportion of the EEA amount recalculated in Step 3. The lower amount is the amount that may be surrendered.
417.Step 5 requires a restriction for any amount excluded from relief by section 127 (arrangements).
418.Subsection (3) deals with the possibility that the accounting period assumed by section 125 does not coincide with the accounting period of the surrendering company. The subsection makes clear that the total of the recalculated amounts is compared with the qualifying part of the EEA amount. See Change 23 in Annex 1.
419.Subsection (4) cross-refers to the need for consent to the surrender. This rule corresponds to the rule in section 99(6) for UK related companies.
Section 114: The equivalence condition
420.This section requires the EEA amount to correspond to an amount that would qualify for United Kingdom group relief. It is based on paragraph 2 of Schedule 18A to ICTA.
Section 115: The EEA tax loss condition: companies resident in EEA territory
421.This section identifies the EEA amount as one calculated in accordance with the relevant foreign tax law. It is based on paragraph 3 of Schedule 18A to ICTA.
422.Subsection (1) applies the section to companies resident in the EEA. The other sort of EEA related companies (those with an EEA permanent establishment) are dealt with in section 116.
423.Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.
424.Subsection (3) excludes an amount that is attributable to a permanent establishment in the United Kingdom. Such an amount may qualify for relief under the rules in Chapter 2.
Section 116: The EEA tax loss condition: companies not resident in EEA territory
425.This section identifies the EEA amount in the case of a company with a permanent establishment in the EEA. It is based on paragraph 4 of Schedule 18A to ICTA.
426.Subsection (1) applies the section to companies not resident in the EEA. The other sort of EEA related companies (thoseresident in the EEA) are dealt with in section 115.
427.Subsection (2) sets out the main condition: it establishes that the Chapter is concerned with an amount that has arisen for tax purposes in an EEA territory.
428.Subsection (3) excludes an amount that arises from activities the profits of which would be exempt under a DTA.
429.Subsection (4) introduces subsections (5) and (6), which explain the sort of arrangements with which subsection (3) is concerned.
430.Subsection (5) sets out the relevant arrangements. They are arrangements between the EEA territory where the permanent establishment is and:
the United Kingdom (paragraph (b)); or
any other territory (paragraph (a)).
431.Subsection (6) identifies the effect of the DTA: it is that any profits from the activities in question would be exempt from tax in the EEA territory.
Section 117: The qualifying loss condition: general
432.This section introduces the rules which exclude from the EEA amount any amount that qualifies for relief abroad. It is based on paragraphs 5 to 7 of Schedule 18A to ICTA.
433.Subsection (1) makes clear that the EEA amount must meet the conditions in all of sections 118 to 120. Those conditions are expressed in the negative. So the conditions are met if foreign relief is not available.
434.Subsection (3) identifies the “relevant non-UK tax” as any foreign tax charged in the relevant EEA territory or in any territory where the surrendering company is resident.
435.Subsection (4) identifies the “resident territory” as any territory in which the surrendering company is resident, apart from the EEA territory to which the EEA company is related.
Section 118: The qualifying loss condition: relief for current and previous periods
436.This section sets out the condition that relief is not available for the current period or for a previous period. It is based on paragraph 6 of Schedule 18A to ICTA.
437.Subsection (1) introduces the section.
438.Subsection (2) deals with any part of the EEA amount that is deductible in calculating profits. The profits are those of any person (not just the surrendering company). And, for the purpose of this section, one looks at the current period and any previous period.
439.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.
440.Subsection (4) makes clear that the section is concerned with whether the relief is available, not with whether it is actually given: the condition cannot be met simply by failing to make any necessary claim for relief.
Section 119: The qualifying loss condition: relief for future periods
441.This section sets out the condition that relief is not available for subsequent periods. It is based on paragraph 7 of Schedule 18A to ICTA.
442.Subsection (1) introduces the section.
443.Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits in any future period. The profits are those of any person (not just the surrendering company).
444.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.
445.Subsection (4) determines that the possibility of foreign tax relief is to be considered as at the end of the period in which the EEA amount arises.
Section 120: The qualifying loss condition: non-UK tax relief in another territory
446.This section sets out the condition that relief is not available in any territory. It is based on paragraph 8 of Schedule 18A to ICTA.
447.Subsection (1) introduces the section.
448.Subsection (2) deals with any part of the EEA amount that may be deductible in calculating profits. The profits are those of any person (not just the surrendering company). Unlike sections 118 and 119, this section deals with tax relief in a territory which is neither the EEA territory where the EEA amount arises nor the territory where the surrendering company is resident. And it is concerned only with relief that has been given, not with relief that may be given.
449.Subsection (3) is similar to subsection (2) but is concerned with relief that is available in a way other than as a deduction in calculating profits.
Section 121: The precedence condition
450.This section deals with the possibility that relief is available in more than one territory. It is based on paragraph 9 of Schedule 18A to ICTA.
451.Suppose there is a chain of companies with a “top” holding company, a “bottom” trading company and a series of other companies each of which is both a subsidiary and a holding company. If the companies are resident in a variety of territories, where there are rules equivalent to those in this Chapter of the Act, it is possible for the losses of the “bottom” trading company to be relievable in several territories.
452.The section resolves the problem by providing that relief is assumed to be given at the lowest possible level in the chain. If the company at that level is UK resident, group relief is available.
453.Subsection (1) introduces the idea that relief may be available in a territory that is neither the United Kingdom nor the territory where the EEA amount arises.
454.Subsection (2) describes the chain of companies. Paragraph (a) establishes that the company in question is in the chain. Paragraph (b) establishes that higher in the chain there is a UK resident company. Paragraph (c) establishes that the surrendering company is a 75% subsidiary of that UK resident company. Paragraph (d) establishes that there is no other UK resident company in the chain between the surrendering company and the company in question.
455.If relief is available to the company in question it is excluded from the EEA amount.
456.Subsection (3) sets out the sorts of relief with which the section is concerned: they are the same as those in section 118(2) (a direct deduction) and (3) (other relief).
Example
A UK resident company U1 owns all the share capital in N, a company resident in the Netherlands.
N owns all the share capital in U2, a UK resident company.
U2 owns all the share capital in G, a company resident in Germany.
G owns all the share capital in F, a company resident in France.
U1 claims group relief for F’s losses.
Subsection (2) of the section applies to G because:
it is resident in Germany (not the relevant EEA territory, which is France);
U2 owns (directly) share capital in G;
F is a 75% subsidiary of U2; and
F is not a subsidiary of U2 as a result of its being a 75% subsidiary of another UK resident company.
So Germany is a territory within subsection (2). If relief for F’s loss is available in Germany no United Kingdom group relief is available. G’s potential claim takes precedence over U1’s claim because G is lower in the chain.
But, in relation to N:
it is resident in the Netherlands (not the relevant EEA territory, which is France);
the only UK resident company that owns share capital in N is U1;
F is a 75% subsidiary of U1; but
F is a subsidiary of U1 only as a result of its being a 75% subsidiary of another UK resident company (U2).
So the Netherlands is not a territory within subsection (2). Even if relief for F’s loss is available in the Netherlands, United Kingdom group relief may be available to U2. U2’s potential claim takes precedence over N’s because U2 is lower in the chain.
Section 122: Assumptions to be made in recalculating EEA amount
457.This section introduces sections 123 to 126. It is new.
Section 123: Assumptions as to UK residence
458.This section is the first of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based on paragraph 12 of Schedule 18A to ICTA.
459.Subsection (1) requires the assumption that the surrendering company is resident in the United Kingdom.
460.Subsection (2) makes clear that the assumption in subsection (1) does not:
affect where the company’s activities are carried on (but section 124 may make an assumption about that); or
treat the company as ceasing to be UK resident at the end of the EEA accounting period (but section 125 treats the company’s accounting period as ending then).
461.Subsection (3) requires the assumption that the surrendering company becomes UK resident at the beginning of the EEA accounting period.
Section 124: Assumptions as to places in which activities carried on
462.This section is the second of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules.It is based on paragraph 13 of Schedule 18A to ICTA.
463.Subsection (1) requires the assumption that the company’s activities are carried on in the United Kingdom instead of in the EEA territory. So any special rules about foreign income do not apply.
464.Subsection (2) makes clear that the assumption in subsection (1) includes the assumption that any land held by the surrendering company is in the United Kingdom.
465.Subsection (3) explains how the United Kingdom concepts of law in subsection (2) (“estate”, “interest” and “rights”) are to be applied to land that is outside the United Kingdom.
Section 125: Assumptions as to accounting periods
466.This section is the third of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules.It is based on paragraph 14 of Schedule 18A to ICTA.
467.Subsection (1) determines the start of the accounting period for recalculating the surrendering company’s EEA amount.
468.Subsections (2) to (4) determine when the accounting period ends. As in section 10 of CTA 2009, the accounting period ends at the end of the EEA accounting period or, if earlier, after 12 months.
469.The section clarifies the position if, exceptionally, the EEA accounting period is longer than two years. Paragraph 14 of Schedule 18A to ICTA does not explicitly cater for this possibility butthe only logical interpretation involves treating the process in sub-paragraphs (2) to (4) as iterative. So this section does not change the law.
Section 126: Assumptions in relation to capital allowances
470.This section is the last of four sets of assumptions to be made in recalculating the EEA amount using United Kingdom tax rules. It is based in paragraph 15 of Schedule 18A to ICTA.
471.Subsection (1) sets out when the section applies.
472.Subsection (2) invokes section 13 of CAA. So the surrendering company is treated as having incurred expenditure on the plant or machinery on the first day of the EEA accounting period. The amount of the expenditure is the market value of the plant or machinery.
473.Subsection (3) ensures that all the relevant rules in the plant and machinery Part of CAA apply in the recalculation of the EEA amount.
Section 127: Amounts excluded because of certain arrangements
474.This section is a rule to deal with contrived situations. It is based on section 403G of ICTA.
475.Subsection (1) excludes from the EEA amount any amount that arises from an “arrangement”. The exclusion is mentioned in Step 5 of section 113(2). Subsection (1)(a) of the section ensures that the rule does not apply to any part of the EEA amount that is attributable to a United Kingdom permanent establishment. That part is dealt with under section 107.
476.Subsection (2) identifies the excluded amount by reference to “arrangements”.
477.Subsection (3) tests the purpose of the arrangements. They are within this section if their main purpose is to secure group relief.
Section 128: Rules for recalculating EEA amount
478.This section requires the EEA amount to be recalculated using United Kingdom tax rules. It is based on paragraph 16 of Schedule 18A to ICTA.
479.If the recalculation results in a lower amount, the recalculated amount (or the relevant proportion of it) is the amount that may be surrendered as group relief (see Step 4 in section 113(2)).
480.Subsection (1) is the basic rule. The EEA amount is recalculated. Furthermore, any rule that would disallow the amount for United Kingdom tax purposes (such as the rule about non-commercial losses) is applied.
481.Subsections (2) to (4) allow the Treasury to make regulations about the recalculation of the EEA amount.
See also [2008] STC 526.
