EU warns UK to change two non-resident company tax laws

The cases could be taken to the European Court of Justice

The European Union has told the U.K. to change two pieces of tax legislation on the transfer of assets to non-U.K. resident companies or further action may be taken to force compliance.

The European Commission has warned the U.K. that unless the discriminatory legislation is dealt with, it could face being taken to the European Court of Justice. The Commission believes that two pieces of U.K. legislation are out of line with the principles of the E.U. single market since investments outside the U.K. are more heavily taxed than domestic investments.

One infringement relates to the U.K.'s "transfer of assets abroad" legislation under which a U.K. resident who invests in a company incorporated in another E.U. member state by transferring assets to it is then subject to tax on the income generated by the company. However, if the same individual invested the same assets in a U.K. company, only the company itself would be liable for tax.

In the second piece of disputed legislation, if a U.K. company acquires more than a 10 percent share of a company in another E.U. country, and the latter company realizes capital gains from the sale of an asset, the gains are immediately attributed to the U.K. company, which becomes liable for corporation tax on these capital gains. If, on the other hand, the U.K. company had invested in another U.K. resident company, only the latter would be taxable on its capital gains.

The Commission believes that both restrictions are disproportionate and go beyond what is reasonably necessary to prevent tax abuse or tax avoidance. The U.K. has two months in which to respond before the Commission can take the investigation to the next stage.

Follow Jennifer on Twitter at @BrusselsGeek or email tips and comments to jennifer_baker@idg.com.

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