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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Non-resident Company: exemptions: Economically Significant Activities - for 2012-13 and later years

The purpose of the requirement in TCGA92/13(5)(ca) is to ensure that only arrangements that are wholly artificial arrangements are caught by the charge under TCGA92/13. The test distinguishes between commercial arrangements, where an asset is held by a non UK resident company for reasons of genuine commercial activity outside the UK, and artificial arrangements put in place for the circumvention of UK tax rules through the holding of an asset in a non UK resident company without genuine commercial use in the UK. An asset will be outside of the scope of TCGA92/S13 if it is used only for the purposes of economically significant activities carried on by the company wholly or mainly outside the UK. (If the activities are wholly or mainly carried on in the UK see CG57315).

Based on the approach of both the Court and Advocate General in Case C-196/04 Cadbury Schweppes, the legislation seeks to differentiate between companies carrying on legitimate economic activities (which reflect economic reality) and those operating wholly artificial arrangements in the host (other) country.

In applying TCGA92/S13 and 13(5)(ca) activities carried on by a company which are ‘economically significant activities’ are to be regarded as legitimate economic activities and excluded from the S13 charge. Such activities are so characterised if they consist of the provision of goods or services to others on a commercial basis and involve:

  • the use of staff (employees, agents or contractors of the company) in numbers and with competence and authority
  • the use of premises and equipment
  • the addition of economic value by the company to those to whom the goods or services are provided

which are commensurate with the size and nature of the activities of the company.

Applying these criteria as indicators of legitimate (as opposed to wholly artificial) arrangements enables an assessment to be made of the genuine nature of the business, activities. For example that:

  1. the non-resident company is genuinely established in another country, which is informed by the number of staff in use, whether they are directly employed or contractors. Also whether the premises they are working from and the equipment available to them is consistent with what would reasonably be expected for a legitimate (genuine) commercial operator, bearing in mind the size and nature of the services offered;
  2. the genuine nature of the services provided by the company - that where the services offered require a level of decision making the staff employed reasonably have the level of competence necessary for a genuine company to operate; and
  3. the company is providing genuine value added contribution on a sound commercial basis - that reasonable consideration is being provided in return for any payment by the UK parent company. For example if the non-resident company is providing services which have no economic substance in relation to the parent company’s activity, then it would indicate that there is a wholly artificial arrangement.

To determine if this exemption applies a clear understanding of the activities of the company and how the asset is used by the company is needed. The features described are indicators of genuine behaviour and should be assessed on that basis. If the arrangements appear genuine time should not be spent on a detailed analysis of scale and proportion - see CG57315.

If the economically significant test is satisfied, no charge is generated under section 13.