Transferring assets abroad: breaches EU law?
- John Deane
- Updated: Mon, 21st Nov 2016
The recent case of Fisher & Ors v Revenue & Customs  covers issues that UK residents should consider before transferring assets abroad. The case showed that the Transfer of Assets Abroad Provisions (the “Provisions”) are inconsistent with EU law in certain circumstances. This finding affect HMRC’s right to tax profits made by companies offshore.
Transfer Assets Abroad
The provisions aim to counteract tax avoidance by preventing individuals setting up offshore structures to “protect” income. The provisions impose income tax charges on UK resident individuals, on a non-UK resident individual or company’s profits when:
- There is a transfer of assets; and
- Income is payable to a foreign individual or company as a result of the transfer; and
- The UK resident, or spouse, has the power to enjoy that income.
These conditions are therefore rather wide. However, the legislation would not impose a liability if the purpose, or one of the purposes, of the transfer was not to avoid tax. This is called the the Motive Test.
Breach of EU law?
The Provisions impose income tax on the UK resident individual on a person resident in another EU Member State’s profits. This imposes on the UK resident higher rates of income tax.
This is because if the UK resident individual was to set up a company in the UK, the profits of that company would be subject to corporation tax rather than the individual being subject to income tax. The Tribunal in Fisher confirmed this and that a UK resident individual could seek protection of EU law; namely, to protect his freedoms of establishment and free movement of capital.
Even though the restrictions imposed by the Provisions would be a breach of the EU freedoms (where the transfer of assets are between EU Member States), the breaches may be justified for example by arguing that the restrictions ensure the prevention of tax avoidance.
However, as was the case in Fisher, there would be no tax avoidance if the offshore company was genuinely commercial and paying tax in the foreign country. Just because the rate of tax may be lower in the foreign country does not mean that it is tax avoidance.
Now that we know that the Provisions are inconsistent with EU law the important task is to interpret the legislation in such a way that it becomes consistent. The Tribunal in Fisher thought the best way to do this was by extending the “old” motive test. The extension would be that the Provisions would bite where the foreign company was not set up for genuine commercial reasons and not operating commercially.
Benefit of the decision for the UK resident taxpayer
Fisher is of significant value for UK resident individuals wanting to set up companies offshore in other EU Member States because the Provisions no longer apply to them. This, of course, will not be the case if the company is set up offshore for artificial reasons. Specific advice would also need to be taken if the transfer of assets is not to another EU Member State.