Court of Justice of the European Union judgment: Gallaher v HMRC
CJEU judgment in Gallaher v HMRC (Case C-707/20) – disposal of assets intra-group.
Gallaher CJEU judgment – transfer of assets
The Court of Justice of the European Union (CJEU) released its judgment in Gallaher on 16 February 2023. This was one of the last references made by the UK during the Brexit transition period under the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union. The case concerns intra-group transfers from the UK to a third country in 2011 and to an EU member state in 2014, and whether the tax treatment of these transfers was compliant with EU law.
During the relevant period, intra-group asset transfers from a UK group company to non-UK residents gave rise to an immediate tax charge on any gains on disposal. There was no provision for deferral of the tax or payment in instalments. If the transfers had been between UK entities, the disposals would be tax neutral (s171 TCGA 1992 and ss775 and 776 CTA 2009).
Broadly, Gallaher appealed against HMRC’s imposition of a tax charge on the transfers on the basis there was a difference in treatment for groups with overseas entities to the UK-UK tax treatment which was incompatible with EU law, relying on the freedom of establishment and/or the free movement of capital. Relevantly the UK company had an indirect parent tax resident in the Netherlands, to which it made a disposal in 2014. The 2011 disposal was made by the UK company to a Swiss sister company (a direct subsidiary of the Netherlands parent). The First-tier Tribunal held that EU law was infringed in respect of the disposal to an EU member state under the freedom of establishment, but not in respect of the third country transfer. On appeal, the Upper Tribunal referred the matter to the CJEU in respect of both disposals.
The CJEU noted that consideration of the UK’s group transfer rules fell primarily under the freedom of establishment, which was not extended to third countries, and did not fall under the scope of the free movement of capital.
The CJEU found that, in respect of the third country transfer, there was no difference in treatment (and so no restriction). This was because, where the transfer had been made to a third country sister company, the UK company would receive the same treatment if the parent was UK resident. In respect of the EU transfer, the CJEU considered there was a difference in treatment resulting in a restriction, but that it may be justified by the balanced allocation of taxing powers. It was common ground that the UK company received consideration for the transfer corresponding to the market value of the assets disposed. Therefore, an immediate tax charge could be proportionate without the need to provide for the possibility of deferring payment of the charge.
The findings of the CJEU may be of limited relevance to taxpayers, unless they sought to rely on the grounds in Gallaher in respect of relevant periods. UK legislation was introduced to allow taxpayers to apply for deferral of the payment of corporation tax on group asset transfers within the EU or the European Economic Area (EEA) for accounting periods ended on or after 10 October 2018. During the Committee Debate on the Finance Bill the Financial Secretary to the Treasury noted that the legislation was to provide certainty whilst the Gallaher case proceeded through the courts and remained unresolved. The Finance Bill allowed for regulations to be made to withdraw the facility for corporation tax instalment plans when no longer necessary.