ETMD: the effect of section 140C
For TCGA 1992 section 140C to have any effect there must be a ‘single chargeable gain’ accruing on the chargeable assets that are transferred by way of a transfer of assets or a partial division. To establish whether there is a ‘single chargeable gain’ separate capital gains computations are required for each chargeable asset that is transferred by way of a transfer of assets or partial division. The computations resulting in gains are added together and the same applies to those which result in allowable losses. The losses are set against the gains and if the net figure is a gain then that is treated as if it were a single chargeable gain, section 140C(3).
The next step is to calculate the actual tax charge on that ‘single chargeable gain’. It could be that the company within the charge to UK tax on that ‘single chargeable gain’ has also suffered a charge to tax on the same assets by the member state in which the permanent establishment was carried on. If that is the case then the company may be entitled to double taxation relief against the charge to UK tax in accordance with any double taxation treaty with that other member state. However it could be that the member state in which the PE was carried on has implemented the ETMD and as a result there is no charge to tax in the other member state on the transfer of assets or partial division involving the PE. In such instances in order to comply with the ETMD and ensure no double taxation section 140C(5) directs that the company within the charge to UK tax on the ‘single chargeable gain’ will be entitled to notional double taxation relief.
The notional double taxation relief is calculated in accordance with what was ICTA section 815A, now TIOPA 2010, section 122. It is for the company to establish the amount of notional double taxation relief when completing their self assessment but this should be calculated on the following basis.
You begin by assuming that the other member state had not implemented the appropriate parts of the ETMD in respect of transfers of assets or partial division carried on by a company through a PE in a different member state from that in which it was resident. You then calculate the tax in that other member state that would have been payable on the assets transferred. In doing so then, so far as permitted under the laws of the member state in which the tax would have been charged, any losses arising on the transfer are set against any gains arising on the transfer and any relief due to the transferor has to have been claimed. If the result is a charge to tax that would have arisen if the other member state had not implemented the appropriate parts of the ETMD then that figure is the amount of the notional double taxation relief.
The member state in which the permanent establishment is located must have implemented the ETMD for section 815A (TIPOA10/S122) to be effective. It may be that prior to implementing the ETMD the other member state already had legislation in place that had the same effect as the requirement within the ETMD. If it can be demonstrated that if existing legislation had not been in place to give effect to the ETMD the other member state would have legislated to do so then HMRC are content to treat that as corresponding to implementation of the ETMD.
An example of how the figure for notional double taxation relief could be arrived at is as follows.
Company A, a UK resident company, has a permanent establishment in another member state, Z. The assets and liabilities of the PE are transferred to company C, which is resident in member state Z. It is assumed that all of the other conditions within section 140C have been met. The single chargeable gain on company A in the UK on the assets transferred is £1,000 producing a tax charge of £200. Member state Z has put in place legislation to give effect to the ETMD. If member state Z had not done so then company A would have been chargeable to tax in that state on the assets transferred. The sterling equivalent of the foreign tax that would have been charged is £100. The figure of £100 is the notional figure that is to be allowed as double taxation relief against the £200 that will be chargeable on company A in the UK.