Restriction on tax free intra-group transfers to recipients within the scope of UK tax contrary to EU law

The FTT has held that the UK rules allowing tax neutral transfers of assets between group companies are contrary to EU law in not allowing a deferral of tax in the case of transfers to recipients not within the scope of UK tax.
  • Submitted 4 April 2019
  • Applicable Law UK , European Union
  • Topic Tax > Corporate

The First-Tier Tribunal (FTT) has held that the failure to extend the “no gain no loss” rules to transfers of capital assets to group entities in other Member States is contrary to the freedom of establishment: Gallaher Ltd v HMRC [2019] UKFTT 207. The FTT also found that it was not possible to apply a conforming interpretation to the UK rules so as to simply defer the UK charge on capital gains and, as such, in disapplying the restriction of the relief to transferees falling in the UK tax net, the gain in this case would entirely fall outside the scope of UK tax.

The FTT did, however, find that a similar transfer of capital assets to a Swiss group company was not contrary to EU law. The relevant freedom in this case was the freedom of establishment, not the free movement of capital, and that only applied to transfers within the EU.


The case concerned a reorganisation of a Japanese headed multinational group. The taxpayer was a UK member of that group. In 2011, the taxpayer sold certain IP rights to a Swiss member of the group (SwissCo) and in 2014 the taxpayer sold all of its shares in a subsidiary to another Dutch member of the group (DutchCo). Both disposals gave rise to chargeable gains. It was accepted that there was no question of tax avoidance on the facts.

The taxpayer contended that the UK rules were contrary to EU law. In particular, it contended that the fact that the no gain no loss provisions in TCGA 1992 s.171 were limited to transfers of assets to companies within the UK tax net (either UK resident or with a UK PE to which the assets related) was contrary to the freedom of establishment and free movement of capital. More specifically, the taxpayer argued that the deficiency in the no gain no loss rules was the failure to allow a deferral of the corporation tax liability in this situation, as had been recognised by the European Court of Justice (ECJ) in various “exit charge” cases.

Decision of the FTT

The decision of the FTT runs to over 100 pages, but, in essence, the issues dealt with are relatively straightforward.

Firstly, the FTT determined that the relevant freedom to consider in these cases was the freedom of establishment. The circumstances of this case involved wholly owned subsidiaries and clearly fell with the concept of “direct influence”. The case law of the ECJ made it clear that company’s in such a situation are exercising their freedom of establishment. Moreover, legislation aimed at relations within a group of companies primarily affects the freedom of establishment and any effects on the free movement of capital should be regarded as simply “unavoidable consequences”.

This was sufficient to deal with the 2011 transfer of IP to SwissCo. It was only if the taxpayer could rely on the free movement of capital (which applies to third country situations, unlike the freedom of establishment) that it might call into question the legality of the UK rules in relation to its transfer to SwissCo. As this was not the case, the taxpayer’s appeal in relation to that element of the case must fail.

This, however, left the 2014 transfer of shares to DutchCo, which clearly fell within the concept of freedom of establishment.

The FTT held that the UK rules, in failing to extend the no gain no loss rules to a transfer to an EU subsidiary within the group structure represented a restriction on the freedom of establishment. The tax charge would not have arisen if the transfer had been to another UK subsidiary. Could the imposition of the charge be justified in these circumstances nevertheless? In particular, was it simply a case of securing a “balanced allocation of the taxing rights” in relation to the shares between the UK and the Netherlands? The FTT agreed that the rules did simply seek to allocate the right to tax gains between the UK and the Netherlands, but they must also be proportionate to satisfy the EU rules.

The FTT noted that the ECJ had held that an upfront tax charge could be disproportionate in the “exit charge” cases, so should (as the taxpayer argued) the UK be obliged to allow deferral of the payment of the tax on the intra-group transfer of the shares? HMRC argued that the “exit charge” cases were not relevant as they dealt with situations where there was a deemed disposal of assets on the migration of a person or company, for example. The reason the deferral was needed in those situations was that it was disproportionate to require upfront taxation of the gain on the assets where the taxpayer was not actually disposing of them and would not have the funds to pay the tax. In the current case, the taxpayer had actually sold the shares and so the same cashflow problems were not relevant.

The FTT rejected this point. None of the case law of the ECJ showed a difference in approach between realised and unrealised gains. The question was simply whether the gains were dealt with differently because the transaction was cross-border. In those circumstances, the FTT considered that the case law of the ECJ clearly showed that the national legislation must provide a mechanism for deferral of the tax on the gain and the UK legislation did not do so.

Furthermore, after a lengthy discussion of the case law, the FTT concluded that it was not able to apply a “conforming interpretation” to the UK tax rules so as to introduce a provision for deferral. Instead it was necessary to disapply the offending UK rule. That was to be achieved by disapplying the provision in s.171 which limited it to transfers to a transferee within the UK tax net. The FTT recognised that this meant that the accrued gain would fall outside the scope of UK tax entirely - going farther than even the taxpayer had argued (which had contended only the gain should be deferred). Indeed, the FTT itself described its decision as “counter-intuitive” given that it is clear that the UK is entitled to impose tax on the gain that had accrued on the shares prior to the intra-group disposal.


The decision in this case will no doubt be appealed by HMRC. In particular, the most controversial aspect of the decision is the question whether the deferral rules should apply on an actual disposal of shares where the taxpayer has the funds to pay the tax. On this point, it should be noted that the disposal was required to be brought in at market value as it was a transaction between related parties, and this may have a bearing on whether failure to allow deferral is disproportionate.

Nevertheless, it is far easier to see why rules taxing unrealised gains should benefit from deferral in a migration situation than in an intra-group transfer. Particularly as the FTT recognised that the UK had the right in this case to tax the accrued gain on the shares. A requirement to defer an accrued and realised gain would, in principle, seem to go too far when the right to tax that gain is unchallenged.

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