In Gallaher Limited v HMRC (Case C-707/20),  the Advocate General to the CJEU decided that the UK group asset transfer rules were justified in restricting the EU Freedom of Establishment and the lack of ability to defer the tax payment was not disproportionate given that consideration was received.

  • Gallaher Limited (GL) is a UK resident company and a member of the worldwide Japan Tobacco Inc. group. It sits within a European sub-group, headed by a Dutch holding company.
  • In 2011 it transferred IP relating to a tobacco brand to another member of the European Group, tax resident in Switzerland. 
  • In 2014, it transferred the shares in a subsidiary to its Dutch parent company.
  • Both transfers were for full market value consideration.
  • Had the transfers taken place between two UK resident companies, both would have been made using the group asset transfer rules. These rules allow assets to be passed between UK resident group companies at nil gain/nil loss for capital gains purposes.
  • HMRC issued partial Closure Notices giving rise to tax assessments on both disposals.
  • GL appealed to the First Tier Tribunal (FTT). GL claimed that imposing a tax charge on it, without the possibility of deferment was contrary to EU law and mores specifically the Freedom of Establishment (for both transfers) and the Freedom of Movement of Capital (for the 2011 asset transfer)..
  • The FTT rejected the appeal for the 2011 transfer on the basis that the Freedom of Establishment was not infringed as the transfer was to a non-EU member. It upheld the appeal in relation to the 2014 transfer.
  • GL appealed the 2011 decision to the Upper Tribunal (UT) and HMRC appealed the 2014 decision.

The UT referred the questions regarding the interpretation of EU law to the CJEU for a preliminary ruling. The Advocate General (AG) delivered the ruling by answering the following questions:

  • Do the EU Freedoms of Establishment and Movement of Capital apply to these transactions?

  • If they apply and do restrict either Freedom; is the restriction justified?

  • If the restriction is justified, is the immediate charge to tax on the gain disproportionate?

As part of the ruling, the AG noted that most UK Double Tax Agreements (DTAs) are based on the OECD Model Tax Agreement. For example the UK : Swiss DTA states at Article 13(5), that where a gain arises on the transfer of an asset between nationals of each state, the taxing powers rest with the state to which the transferor belongs. In the instance of the transfer of the shares in 2014, the UK would retain the taxing rights.

In answering the questions, the AG found that:

  • The UK group asset transfer rules apply only to group companies (75% control or more). This level of control is related to the Freedom of Establishment. The Freedom of Movement of Capital applies to investments without such levels of control. Where the Freedom of Establishment is involved, it is the Freedom of the parent company that is under scrutiny. Was the parent company discriminated against by the rules of the UK?
  • The tax liability arising from the disposal of assets to Switzerland (2011 disposal) would have arisen regardless of the tax residency of the parent company. The charge would have arisen if GL’s parent company had been UK tax resident and not Dutch. Therefore, there was no infringement of the Freedom in this particular instance.
  • In relation to the transfer of shares to the Dutch parent company, there was clearly a restriction of the Freedom of Establishment imposed upon the Dutch parent. However, it is established by case law that such a restriction can be imposed on the grounds of public interest, namely to preserve the balance of taxing powers. The CJEU has previously said that this restriction can apply and is specifically appropriate in relation to exit charges.
  • The CJEU had ruled before that an immediate charge to tax on unrealised gains subject to exit charges are disproportionate given the liquidity of the taxpayer. However, the 2014 disposal concerned a realised gain. In respect of these disposals, GL received full market value consideration for both.
  • The AG decided that where consideration has been received which enables the payment of tax, no deferment is required in order for the group transfer rules to be justified and proportionate.

The AG held that the difference in tax treatment between domestic transfers and cross-border transfers was permissible where it protects the balance in taxing powers between Member States (on the grounds of public interest). There was also no need to allow for a deferral of the tax charge to ensure proportionality of the application of such powers, given that in this instance, the taxpayer had received market value consideration that allowed for the tax liability to be paid.

Useful guides on this topic

What qualifies as a group for tax? How do you form a group? Which definition of a group applies for different types of tax? What are the benefits of being in a group?

Companies: Permanent establishment & residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?

External link

Gallaher Limited v HMRC (Case C-707/20)