Policy paper

Statement of Practice 2 (1992)

Published 28 February 1992

Background

1. Article 67 of the Treaty establishing the European Economic Community (EEC) provides, inter alia, that Member States shall progressively abolish between themselves all restrictions on the movement of capital belonging to persons resident in Member States. This provision is implemented by the Directive of the Council of the European Communities No 88/361/EEC of 24 June 1988. Article 1 of the Directive requires Member States to abolish restrictions on movements of capital taking place between persons resident in Member States.

Note: Article 67 substituted by the Treaty on European Union, and renumbered article 56 by the Treaty of Amsterdam.

2. As a consequence, the provisions of Taxes Act (TA) 1988 section 765, which make certain transactions unlawful if they are carried out without Treasury consent, have been disapplied by TA 1988 section 765A(1) so that as from 1 July 1990, the date from which the Directive took effect, a UK resident body corporate no longer requires Treasury consent before carrying out a transaction which is a movement of capital to which Article 1 of the Directive applies. However, section 765A(2) requires the body corporate to provide HM Revenue and Customs (HMRC) with information on certain of the transactions within 6 months of carrying them out.

Purpose of this statement

3. Paragraphs 5 to 23 of this statement seek to explain the views of the Treasury and HMRC where there may be doubt as to whether a transaction is a movement of capital to which Article 1 of the Directive applies. Their purpose is to assist UK resident bodies corporate in deciding whether they should seek Treasury consent for a transaction or report it to HMRC. However, it is the responsibility of the UK resident body corporate which considers that a transaction which it has carried out (or proposes to carry out) is one liberalised by the Directive to justify that view.

4. Paragraphs 24 to 26 give guidance on procedure to bodies corporate making a report under section 765A(2) in accordance with the Regulations made under the section.

The Channel Islands, the Isle of Man and Gibraltar

5. The provisions of the Directive do not apply to movements of capital between residents of Member States and residents of the Channel Islands and the Isle of Man. But by virtue of Article 227(4) of the Treaty establishing the EEC, that Treaty applies to Gibraltar, subject to the exceptions mentioned in Article 28 of the Act of Accession of Denmark, Ireland and the UK. It follows that the Directive is as fully applicable to Gibraltar as to any other community territory. However, Gibraltar is not itself a Member State being regarded for the purposes of Community Law as part of the territory of the UK. It follows that, while transactions which are movements of capital between residents of Gibraltar and residents of other Member States are within section 765A rather than section 765, movements of capital between residents of Gibraltar and residents of the UK are wholly internal to the UK and are still governed by section 765.

Difference between general and special consent transactions

6. Section 765 has ceased to apply to all transactions which are movements of capital within Article 1 of the Directive. But a body corporate has to report to HMRC only those transactions for which it would need to apply to the Treasury for special consent if they were not movements of capital within the Directive. A transaction which would be covered by a general consent if it were not a movement of capital within the Directive would be lawful when carried out even if the Directive did not apply to it and so should not be reported under section 765A(2).

Movements of capital

7. Annex 1 to the Directive lists a wide range of operations which are within the Directive. These include ‘all the operations necessary for the purpose of capital movements - conclusion and performance of the transaction and related transfers’ but the list is not exhaustive - the Directive makes clear that it is looking to the principle of full liberalisation of capital movements. The Treasury and HMRC have been advised that all issues and transfers of shares and debentures within subsection (1) of section 765 which take place between residents of Member States may be considered movements of capital within the Directive subject to the reservation in paragraphs 8 and 9.

8. Section 1 is concerned with direct investment. The explanatory notes define direct investment generally as ‘investments of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity’. The expression ‘with a view to establishing or maintaining lasting economic links’ is also used in the description of certain operations listed in Part 1. In the view of the Treasury and HMRC, it can be inferred that a transaction otherwise falling within the description of direct investment which is not carried out with a view to establishing or maintaining such links is not a movement of capital to which the Directive applies.

Revenue interpretation 215

This paragraph does not apply to transactions carried out on or after 1 January 1994 following changes made by the Maastricht Treaty.

9. The Treasury and HMRC recognise that transactions of a direct investment type with companies resident in Member States will normally be carried out with a view to establishing or maintaining lasting economic links with those companies. But that may not always be so and the treatment of particular cases will depend on their facts. Where, for example, a company is used as nothing more than a conduit the transaction is unlikely to be carried out with a view to establishing or maintaining such links with that company. This may be the case where a subsidiary resident in another Member State issues a debenture to its UK resident parent for a sum which is immediately loaned back to the parent or another member of the UK group.

Revenue interpretation 215

This paragraph does not apply to transactions carried out on or after 1 January 1994 following changes made by the Maastricht Treaty.

Issues and transfers of shares and debentures between residents of Member States

10. A transaction is excluded from section 765 by section 765A only if it is a movement of capital between residents of Member States. Thus, for example, a parent company which is a resident of the UK may hold directly all the shares in a company which is a resident of the Netherlands and all the shares in a US company which is not a resident of a Member State. If the parent company transfers its shares in the Netherlands company to the US company that transaction will require Treasury consent because the transfer is not between residents of Member States. But if the parent company transfers its shares in the US company to the Netherlands company that transfer is between residents of Member States and is within section 765A and so excluded from section 765.

11. Similarly, a subsidiary company which is a non-resident body corporate within section 765(1)(c) and a resident of a Member State may issue shares at the same time to persons who are not so resident. The former issue is a movement of capital between residents of Member States and excluded from section 765. But the latter issue is still within section 765 and Treasury consent will be required.

12. Article 67 and consequently Council Directive 88/361/EEC relate to restrictions which apply as between Member States. They have no application to movements of capital and restrictions which are wholly internal to a single Member State. For example, a company which is a resident of the UK holds all the shares in a US company which is not a resident of a Member State. If the UK company transfers the shares to another company which is a resident of the UK that is not a capital movement which is within the terms of the Directive. The transaction will require Treasury consent - (such transfers will often be within the terms of the general consents).

13. A transaction for which a UK resident company requires consent under section 765 unless section 765A applies may be a movement of capital between persons resident in the same Member State other than the UK. The Treasury and HMRC regard that transaction as not being wholly internal to a single Member State and therefore within section 765A because the body corporate requiring consent is resident in the UK which is a different Member State - (such transactions if consent under section 765 were required would often be within the terms of the general consents).

Residents of Member States within the meaning of the Directive

14. The explanatory notes to the Directive give to ‘residents or non-residents’ the meaning of ‘natural and legal persons according to the definitions laid down in the Exchange Control Regulations in force in each Member State’. ‘Natural or legal persons’ are ‘as defined by the national rules’. In most cases, the territory where a company or natural person is resident will be self-evident.

15. Some Member States still have exchange control regulations in force although that may not always be so. Others, including the UK, have no such regulations. In the view of the Treasury and HMRC this cannot mean that section 765A and, still less, the Directive will be ineffective. But it does introduce an element of uncertainty into the application of the Directive to transactions within section 765. Paragraphs 16 to 23 explain the approach of the Treasury and HMRC to the question of residence for the purposes of determining whether a movement of capital is between residents of different Member States so that section 765A applies or whether the movement of capital is wholly within the UK or across the external frontier of the Community so that it is still within section 765.

The UK resident body corporate in TA 1988 section 765

16. Since the main effect of the Directive in the UK is to render unlawful the restrictions which are placed by section 765 on bodies corporate which are resident in the UK entering into transactions which are capital movements between Member States, it is logical to regard bodies corporate which are resident in the UK for the purposes of that section as being residents of the UK within the meaning of the Directive. Consequently a body corporate will be considered to be a resident for the purposes of the Directive if it is resident in the UK for tax purposes. However, the persons from which those restrictions are lifted by the Directive are not the only persons whose residence has to be ascertained in order to discover the scope of the Directive.

Other persons resident in Member States

Exchange control regulations

17. So long as there are exchange control regulations in force in a Member State, they will determine residence or non-residence in that state for the purposes of the Directive. As the position of Member States on exchange control at the time this statement was prepared was in the process of change, it is not possible to indicate in this statement which states retain regulations.

The relevance of tax residence

18. If there are no Exchange Control Regulations, the Treasury and HMRC will usually regard a person as resident in a Member State (including the UK) if that person is resident in that state for its tax purposes. But there may be circumstances in which tax residence is too restrictive a criterion to determine whether a transaction is a movement of capital to which the Directive applies.

Economic activities

19. A person who is not a tax resident in a Member State may have a presence in a Member State for the purpose of a continuing economic activity there. A company may have a branch in a Member State (see paragraph 20). Or an individual may have moved to a Member State with the intention of remaining there to carry on business but may not yet be resident for tax purposes. If a movement of capital is part of that economic activity it would be regarded as made to or by a person resident in that state for the purpose of determining whether a transaction is within section 765A.

Branches in Member States

20. As paragraph 19 suggests, a transaction carried out by a branch in a Member State may be regarded as a transaction by a person resident in that state. For example, a UK company holds all the shares in a US company which is not a resident of a Member State and all the shares in a French company which is a resident of a Member State. The US company has a branch in the UK and lends money to the French company which issues a debenture. The loan is made by the UK branch of the US company. Normally a transaction between the US company and the French company would not be within the Directive. But the UK branch can be treated as a resident of the UK for the purposes of the Directive and the transaction is therefore within section 765A and Treasury consent is not required. Whether or not a transaction is carried out by a branch will be a question of fact.

Branches not in Member States

21. There may be a movement of capital to or from a branch not in a Member State of a company which is resident in a Member State. The Treasury and HMRC will regard that as a movement of capital by or to a person resident in the Member State unless exchange control regulations in the state in which the company is resident treat branches outside the state as non-resident.

Resident of Gibraltar

22. Although Gibraltar is not a Member State (see paragraph 5 above) it will be necessary under some circumstances to decide if a person is a resident of Gibraltar. In relation to transactions with a Member State other than the UK a company will be considered to be resident in Gibraltar if it is liable to tax on income by reason of residence, domicile, place of management or other criterion of a similar nature or the transaction is carried out by the Gibraltar branch of a company which is not otherwise resident in Gibraltar. Whether the transaction is carried out by the Gibraltar branch will be a question of fact. An individual will be resident in Gibraltar for these limited purposes if they are resident in Gibraltar for the purposes of Gibraltar tax.

Information on residence

23. The Movements of Capital (Required Information) Regulations, Statutory Instrument 1990/1671 require the resident body corporate to state, where relevant, the grounds on which a person is claimed to be resident in a Member State for the purposes of the Directive. A company which owes its status as a body corporate to the laws of a Member State and has its main place of business there will usually be a resident of that state for both exchange control (if any) and tax purposes, as will individuals who have their usual place of residence there. The Treasury and HMRC will normally accept a presumption that such a company or individual is a resident of that state for the purposes of the Directive.

Procedure for providing information under Taxes Act 1988 section 765A(2)

24. The nature and extent of the information to be reported under section 765A(2) are laid down in the Movements of Capital (Required Information) Regulations, Statutory Instrument 1990/1671. Copies of the Regulations are available from The Stationery Office. The information should be given in a letter addressed to:

HMRC
CT & VAT
100 Parliament Street
London
SW1A 2BQ.

It would be helpful if an additional copy of the letter could be supplied.

25. Provided all the information required by the Regulations is covered, the letter need not be in any particular form. But it will usually be helpful if it follows broadly the order in which the information is requested in the Regulations.

26. Section 765A requires a transaction to be reported after it has taken place. It may be part of a series of transactions for one or more of which the company making the report has obtained Treasury consent under section 765. If in that case part or all of the information required by the Regulations has been given to the Treasury or to HMRC in connection with the application for consent, it is necessary only to identify in the report under section 765A(2)(a) the relevant letters in which the information was given.

Cross references

European Community Capital Movements Directive 88/361 EEC.

Movements of Capital (Required Information) Regulations, SI 1990/1671.

Note: this statement was revised in August 2005.