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Without prejudice to the generality of the conditions set out at INTM603100, the legislation sets out two sets of circumstances which are not ‘genuine’. The first is concerned with the arm’s length principle, and the second is based on the concept of a business establishment which may be argued to be being carried on overseas.
This is set out at section ITA07/S742A and is subject to an ‘uncommercial activities’ exclusion at ITA07/S742A(11).
The test considers, having regard to all the arrangements under which the transaction is effected and any other relevant circumstances:
Freedom of movement of capital may cover certain gifts.
ITA07/S742A(11) disapplies the arm’s length principle in the specific situation where:
This is defined at section ITA07/S742A(13), for the purposes of the genuine transactions exemption as including both:
This test at section ITA07/S742A(7)-(10) reflects an approach developed in EU law mainly in the context of controlled foreign companies.
The question of whether there is any economic activity in relation to the transfer of the asset carried on by a business establishment is, however, a useful threshold test and a practical approach in many cases. The test applies where any asset is used for the purposes of (or income is received in the course of) activities carried on outside the UK by a ‘relevant person’ in a ‘business establishment’.
The assets and income referred to are set out at ITA07/S742A(12):
For this purpose, business establishment is defined by reference to the permanent establishment definition at CTA10/S1141-1143, adapted to the carrying on of activities by a person (the relevant person), rather than by a company – ITA07/S742A(10).
In order for the transaction to be considered ‘genuine’, those activities must consist of the provision by the relevant person of goods or services to others on a commercial basis and involve the following objective features:
commensurate with the size and nature of the activities which are argued to be carried on outside the UK.
If arrangements observe the arm’s length principle, and if there are genuine commercial activities taking place outside the UK, then there should be no difficulty gaining the benefit of the genuine transactions exemption, even where the avoidance purpose exemption does not apply.
This can be illustrated by the following example.
Mr Jones is an individual who is UK resident and domiciled. He runs a successful business manufacturing and distributing products around the world. The business has expanded and consists of a UK company with various other companies established in other countries as the business has expanded into them. Mr Jones owns each of the companies’ share capital, but in July 2013 wants to consolidate the business under a single holding company. After considering various options he decides that he will establish the holding company in another EU Member State because it has an advantageous tax regime.
Mr Jones subscribes for shares in an off-the-shelf company in that Member State and consolidates his other companies under this new holding company. As part of the arrangements, senior members of his management team move to work in the other Member State, and the new company acquires offices and employs a number of local staff to assist the management team in their duties. The companies within the newly formed group pay a management fee to the holding company in recognition of the services it provides, and regularly vote dividends to it out of the profits they make.
Mr Jones continues to work in the business although he continues to be UK resident. However, he does visit the holding company’s offices on a regular basis. He receives a salary for the services he provides, but the holding company does not pay him a dividend as it is re-investing its profits to expand the business.
In such a situation HMRC would accept that the genuine transactions exemption applied to the profits of the holding company situated in the other EU Member State as the conditions for exemption would be in point, although the avoidance purpose exemption would not appear to apply.
However, where attempts are made to shift profits out of the UK artificially, HMRC will, if necessary, apply the principles of international tax law to identify where profits are actually made, having regard in appropriate cases to
In complex cases, the OECD principles of profit attribution may need to be invoked. Establishing a brass plate operation in a low tax regime – even one elaborately decorated – will not suffice. The question to be addressed is: whether, having regard to all the facts, profits are actually generated in the establishment in relation to the transfer of the asset?
Consider again the example of Mr Jones above. Rather than the new holding company acquiring business premises and having a workforce in the other EU Member State, Mr Jones asks employees of the service company provider – from whom he acquired the off-the-shelf company – to act as company directors while the business continues to be operated from the UK by Mr Jones and his management team. In such circumstances HMRC would contend that the genuine transactions exemption would not apply as the tests above would not have been complied with.
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