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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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ETMD: transparent entities: share exchanges

A share for share exchange which attracts the benefits of the rollover treatment within TCGA 1992 section 127 is where a company (B) issues shares or debentures to a person in exchange for shares or debentures in another company (A) - the exchange being within one of the classes in section 135(2). See CG52521 for further guidance on share-for-share exchanges and section 135. Where one of the entities involved, ie. B or A is

  1. listed in annex 3 of the ETMD
  2. a transparent entity within the meaning of section 140L(1)(c) and,
  3. irrespective of that fact (i.e. is a transparent entity) section 135 would have applied to the exchange then,

section 140H will have effect.

Section 140H(2)(b) disapplies section 135(3). It is section 135(3) which would apply section 127 therefore the shareholders and debenture holders in company A will not have the benefit of the ‘no disposal fiction’ at section 127 and will have to prepare a computation to establish whether there is a gain or a loss on the disposal of the shares and/or debentures in company A.

Sections 140H(3) & (4) provide the rules for ensuring that there is no double taxation. Shareholders or debenture holders who incur a liability to tax as result of the effect of section 140H may be able to set notional double taxation relief against such a charge. The notional relief will be equal in amount to the tax that would have been chargeable under the law of another member state if that other member state had not put in place legislation to give effect to the Directive; section 140H(3).

In calculating any gain then so far as permitted under the law of the relevant state losses arising on the exchange are set against gains arising on the exchange and any relief available to company A under that law is assumed to have been claimed; section 140H(4).

An example of where section 140H could be in point is where company B, a UK resident company, offers to acquire the interests in company A in exchange for an issue of shares to the interest holders in company A. Company A is resident in another member state and is listed in the annex 3 to the directive but it does not have ordinary share capital and therefore section 140L(1)(c)(i) applies to provide that company A is to be treated as a transparent entity, see CG45723.

Rob, who is chargeable to UK capital gains tax, holds an interest in company A and as result of the ‘exchange’ he acquires shares in company B. Company A is listed in the annex to the ETMD. It is a transparent entity for UK tax purposes and if that were not the case section 135 would have applied to the exchange. Consequently section 140H applies which means that section 135(3) does not have effect and Rob is charged to UK tax on the disposal of his interests in the assets held by company A. The tax chargeable on Rob is say £1,000. The member state in which Company A is resident, and is therefore subject to tax, has put in place legislation to give effect to the ETMD but has not adopted the opt out. Therefore there has been no disposal for the purposes of tax in that member state. If the legislation to give effect to the ETMD had not been in place in that other member state then Rob’s share of the tax that would have been payable in that other member state would have been say £400. The figure of £400 is the notional tax that would be available to be set against Rob’s charge to UK tax of £1,000. If there are other UK persons who held a chargeable interest in company A they too would be chargeable and they would be equally eligible to deduct notional tax against the UK tax payable.