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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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ETMD: transparent entities: general approach

CG45722 explains that for the purposes of transactions within the ETMD member states are expected to treat transparent entities in the same way as opaque entities but that an opt out is available provided that where this applies member states must take steps to prevent double taxation.

The UK has fully adopted the opt out and therefore does not have to treat transparent entities as if they were opaque but in accordance with the ETMD provision has been made to prevent double taxation.

The type of transactions within the ETMD which are affected by the changes introduced for transparent entities are share for share exchanges within TCGA 1992 section 135 and partial divisions or mergers within section 140A - F.

The general approach adopted within UK tax legislation is to establish whether

  1. an entity involved in the transactions to which any of the sections listed in the previous subparagraph applies are listed in annex 3 to the ETMD
  2. in accordance with section 140L(1)(c) any of the entities so involved are transparent entities
  3. irrespective of the fact that any of the entities involved in the transactions are a transparent entity would the conditions within section 135, or section 140A or section 140E be met?

If the answer to these questions is yes then the effect of any relevant section, eg. section 135 is disapplied. This means that on the occasion of say a share for share exchange there will be a disposal and a gain or loss may accrue to the shareholder in the target company. Double taxation is prevented by providing for notional double taxation relief in exactly the same way as that for transactions that fall within section 140C, see CG45715.

Sections 140H- K provide the necessary legislative cover to allow this general approach to apply to transaction within sections 135, 140A and 140E. CG45724-8 provides guidance and examples of how sections 140H-K operate and how they prevent double taxation.

Note: Section 140H-L can only have effect for mergers to form a SE or SCE which take place on or after 18 August 2006 and for all other mergers which take place on or after 1 January 2007.