First-tier Tribunal (Tax)

Glossary of cases

Introduction

The relevant facts

(a)          the Appellant is a UK resident company and is a member of the Japan Tobacco Inc. ("JT") group of companies (the "JT Group"). JT is a publicly-listed company resident in Japan. The JT Group is a global tobacco group and distributes products in 130 countries worldwide. The Appellant and JT were incorporated in, respectively, England & Wales and Japan;

(b)          the Appellant became a member of the JT Group in 2007 when the shares in its UK resident parent company, Gallaher Group Limited (which at the time was called Gallaher Group Plc) ("GGL"), were acquired by a JT Group UK resident company called JTI (UK) Management Limited ("JTIUM");

(c)          JTIUM is owned by JTIH, a company resident in the Netherlands. JTIH also owns the entire shareholding in JTISA, a company resident in Geneva, Switzerland. Neither JTIH nor JTISA has a permanent establishment within the UK and neither is within the charge to UK corporation tax;

(d)         following a restructuring that took place in 2009 and 2010, Benson & Hedges Limited ("B&HL") became the Appellant's immediate parent company. In turn, Gallaher Overseas (Holdings) Limited ("GOHL") became the immediate parent of B&H Limited;

(e)          thus, the Appellant is an indirect wholly-owned UK resident subsidiary of JTIH, which holds its interest in the Appellant through its wholly-owned UK resident subsidiaries JTIUM, GGL, GOHL and B&HL, whilst JTISA is a direct wholly-owned Swiss resident subsidiary of JTIH;

(f)           JTISA has been based in Geneva since its incorporation in 1999;

(g)          the 2011 Disposal involved the sale by the Appellant of certain intellectual property rights relating to tobacco brands (the "Brands") and related assets to JTISA on 1 January 2011;

(h)          all of the Brands continue to be owned by JTISA;

(i)            the consideration received by the Appellant for the 2011 Disposal was £2,410,316,000 (the "Consideration"). In respect of the Consideration, on 4 January 2011:

(i)                 JTIH made inter-company loans totalling the amount of the Consideration to JTISA;

(ii)               JTISA paid the Consideration to the Appellant;

(iii)             the Appellant paid a dividend for the amount of the Consideration to B&HL, and equivalent dividends for the amount of the Consideration were paid, sequentially, by B&HL to GOHL, by GOHL to GGL and by GGL to JTIUM; and

(iv)             JTIUM paid a dividend in the amount of £1,260,090,000 to JTIH and, separately, repaid the balance of a £1,150,226,000 outstanding inter-company loan to JTIH;

(j)            in consequence of the 2011 Disposal, JTISA acquired legal title to the Brands and related assets;

(k)          as a consequence of the 2011 Disposal and contemporaneous contractual arrangements agreed between the Appellant and JTISA, the Appellant's role in relation to the Brands was to act as:

(i)                 a manufacturer in respect of the Brands; and

(ii)               a limited risk distributor of the products bearing the Brands in the UK; and

(l)            following the 2011 Disposal, the Appellant continued to own the Mayfair brand rights (worldwide rights) and the rights to use certain other brands in Ireland and eastern Europe.

(a)          the Appellant is a UK resident company and is a member of the JT Group.  JT is a publicly-listed company resident in Japan. The JT Group is a global tobacco group and distributes products in 130 countries worldwide. The Appellant and JT were incorporated in, respectively, England & Wales and Japan;

(b)          the Appellant became a member of the JT Group in 2007 when the shares in its UK resident parent company, GGL, were acquired by a JT Group UK resident company - that is to say, JTIUM;

(c)          JTIUM is owned by JTIH, a company resident in the Netherlands. JTIH does not have a permanent establishment within the UK, nor is it within the charge to UK corporation tax;

(d)         following a restructuring that took place in 2009 and 2010, B&HL became the Appellant's immediate parent company. In turn, GOHL became the immediate parent company of B&HL;

(e)          thus, the Appellant is an indirect wholly-owned UK resident subsidiary of JTIH, which holds its interest in the Appellant through its wholly-owned UK resident subsidiaries JTIUM, GGL, GOHL and B&HL;

(f)           on 16 September 2014, the Appellant sold all of the issued share capital which it held as registered shareholder in one of its subsidiaries, an Isle of Man incorporated company, Galleon, to JTIH;

(g)          at the same time, Teofani Limited ("TL"), which held 0.01% of the issued share capital in Galleon as nominee for the Appellant, also sold its shareholding to JTIH. The Appellant received all of the consideration from JTIH in respect of the 2014 Disposal, including in relation to the shares held on its behalf by TL; and

(h)          the consideration received by the Appellant for the 2014 Disposal was £2,089,000. The 2014 Disposal gave rise to a chargeable gain before adjustments of £1,551,000.

The relevant issues

(a)           the EU Law Issue should be determined by the First-tier Tribunal as a preliminary issue because, depending on the outcome of the EU Law Issue, the Valuation Issue may not be relevant to the dispute between the parties; and

(b)          if, after a decision on the EU Law Issue has been reached, the Valuation Issue remains relevant to the dispute, then the parties will seek to agree figures and, if agreement cannot be reached, they will revert to the First-tier Tribunal.

The relevant law

The relevant provisions of the UK domestic legislation

"(1) This section has effect for the interpretation of sections 171 to 181 except in so far as the context otherwise requires...

(2) Except as otherwise provided—

(a) ...

(b) subsections (3) to (6) below apply to determine whether companies form a group and, where they do, which is the principal company of the group;

(c) ...

(d) "group" and "subsidiary" shall be construed with any necessary modifications where applied to a company incorporated under the law of a country outside the United Kingdom.

(3) Subject to subsections (4) to (6) below—

(a) a company (referred to below and in sections 171 to 181 as the "principal company of the group") and all its 75 per cent subsidiaries form a group and, if any of those subsidiaries have 75 per cent subsidiaries, the group includes them and their 75 per cent subsidiaries, and so on, but

(b) a group does not include any company (other than the principal company of the group) that is not an effective 51 per cent subsidiary of the principal company of the group.

(4) A company cannot be the principal company of a group if it is itself a 75 per cent subsidiary of another company.

...

(7)  For the purposes of this section and sections 171 to 181, a company ("the subsidiary") is an effective 51 per cent subsidiary of another company ("the parent") at any time if and only if—

(a) the parent is beneficially entitled to more than 50 per cent of any profits available for distribution to equity holders of the subsidiary; and

(b) the parent would be beneficially entitled to more than 50 per cent of any assets of the subsidiary available for distribution to its equity holders on a winding-up…"

"(1) Subsections (2) to (4) define, for the purposes of the Corporation Tax Acts, the circumstances in which a body corporate ("B") is a 51% subsidiary, a 75% subsidiary or a 90% subsidiary of another body corporate ("A").

…

 (3) B is a 75% subsidiary of A if at least 75% of B's ordinary share capital is owned directly or indirectly by A.

…

(6) In this Chapter references to ownership are to be read as references to beneficial ownership."  

"(1) Where—

(a) a company ("company A") disposes of an asset to another company ("company B") at a time when both companies are members of the same group, and

(b) the conditions in subsection (1A) below are met,

company A and company B are treated for the purposes of corporation tax on chargeable gains as if the asset were acquired by company B for a consideration of such amount as would secure that neither a gain nor a loss would accrue to company A on the disposal.

(1A) The conditions referred to in subsection (1)(b) above are—

(a) that company A is resident in the United Kingdom at the time of the disposal, or the asset is a chargeable asset in relation to that company immediately before that time, and

(b) that company B is resident in the United Kingdom at the time of the disposal, or the asset is a chargeable asset in relation to that company immediately after that time.

For this purpose an asset is a "chargeable asset" in relation to a company at any time if, were the asset to be disposed of by the company at that time, any gain accruing to the company would be a chargeable gain and would by virtue of section 10B form part of its chargeable profits for corporation tax purposes.

..."

"764 Meaning of "company", "group" and "subsidiary"

(1) This Chapter applies for the purposes of this Part to determine whether companies form a group and, where they do, which is the principal company of the group.

...

765 General rule: a company and its 75% subsidiaries form a group

(1)  The general rule is that—

(a) a company ("A") and all its 75% subsidiaries form a group, and

(b) if any of those subsidiaries have 75% subsidiaries, the group includes them and their 75% subsidiaries, and so on.

(2)  A is referred to in this Chapter and in Chapter 9 as the principal company of the group.

(3) Subsections (1) and (2) are subject to the following provisions of this Chapter.

766 Only effective 51% subsidiaries of principal company to be members of group

(1) A group of companies does not include any company (other than the principal company of the group) that is not an effective 51% subsidiary of the principal company of the group…

767 Principal company cannot be 75% subsidiary of another company

(1) The general rule is that a company ("A") is not the principal company of a group if it is itself a 75% subsidiary of another company ("B").

..."

"775 Transfers within a group

(1) A transfer of an intangible fixed asset from one company ("the transferor") to another company ("the transferee") is tax-neutral for the purposes of this Part if—

(a) at the time of the transfer both companies are members of the same group,

(b) immediately before the transfer the asset is a chargeable intangible asset in relation to the transferor, and

(c) immediately after the transfer the asset is a chargeable intangible asset in relation to the transferee.

(2) For the consequences of a transfer being tax-neutral for the purposes of this Part, see section 776.

..."

"776 Meaning of "tax-neutral" transfer

(1) This section sets out the consequences of a transfer of an asset being "tax-neutral" for the purposes of this Part.

(2) The transfer is treated for those purposes as not involving—

(a) any realisation of the asset by the transferor, or

(b) any acquisition of the asset by the transferee.

(3) The transferee is treated for those purposes—

(a) as having held the asset at all times when it was held by the transferor, and

(b) as having done all such things in relation to the asset as were done by the transferor.

(4) In particular—

(a) the original cost of the asset in the hands of the transferor is treated as the original cost in the hands of the transferee, and

(b) all such credits and debits in relation to the asset as have been brought into account for tax purposes by the transferor under this Part are treated as if they had been brought into account by the transferee.

(5) The references in subsection (4)(a) to the cost of the asset are to the cost recognised for tax purposes."

"741 Meaning of "chargeable intangible asset" and "chargeable realisation gain"

(1) For the purposes of this Part, an asset is a "chargeable intangible asset" in relation to a company at any time if any gain on its realisation by the company at that time would be a chargeable realisation gain.

(2) For the purposes of this Part, "chargeable realisation gain", in relation to an asset, means a gain on the realisation of the asset that gives rise to a credit required to be brought into account under this Chapter.

...

(4) For the purpose of subsections (1) and (2), ignore any question whether—

 (a)...

 (b) a transfer of an asset is tax-neutral for the purposes of this Part (see section 776)."

(a)          first, it can be seen that each of JTIH, JTISA and the Appellant is, and was, at the time of each Disposal, a wholly-owned indirect subsidiary of JT and therefore, pursuant to the definition of "group" set out in each of Section 170 of the TCGA and Section 765 of the CTA 2009, members of the same group - that is to say, a group of which JT was the principal company;

(b)          secondly, where Section 171 applies in relation to a disposal of assets, then no tax charge arises when assets are transferred from one company in the group (A) to another (B). This is because the disposal in question is deemed to be effected for such consideration as gives rise to neither a gain nor a loss for A, which means that B is treated as acquiring a base cost in the relevant assets which is equal to A's base cost in the relevant assets. However, a tax charge may arise in the future if the assets are the subject of a disposal in circumstances where Section 171 does not apply - for example, if B sells the assets outside the group. Furthermore, in certain circumstances, a tax charge will be imposed if the transferee company (i.e. B) ceases to be a member of the group within six years of the disposal to it (see Section 179 of the TCGA 1992);

(c)          thirdly, where Section 775 applies in relation to a disposal of intangible fixed assets, then no tax charge arises under Part 8 of the CTA 2009 when the assets in question are transferred from one company in the group (A) to another (B). This is because B is treated as having held the relevant assets at all times when the relevant assets were held by A and as having done all such things in relation to the relevant assets as were done by A. Consequently, the original cost of the relevant assets in the hands of A is treated as the original cost of the relevant assets in the hands of B and all such credits and debits as have been brought into account for tax purposes under Part 8 of the CTA 2009 by A are treated as if they had been brought into account by B.  However, a tax charge may arise in the future if the assets are the subject of a disposal in circumstances where Section 775 does not apply - for example, if B sells the assets outside the group. Furthermore, in certain circumstances, a tax charge will be triggered if the transferee company (i.e. B) ceases to be a member of the group within six years of the disposal to it (see Section 780 of the CTA 2009); and

(d)         finally, it should be noted that, whilst the effect of both the application of Section 171 and the application of Section 775 is to defer the crystallisation, for tax purposes, of the gain on the assets which are the subject of the relevant disposal, the two provisions operate in slightly different ways.  In the case of Section 171, the disposal in question is recognised for tax purposes but is deemed to have taken place for such amount as gives rise to neither a gain nor a loss for A, whereas, in the case of Section 775, the disposal in question is treated as not having taken place and, instead, B steps into the shoes of A.

The relevant provisions of EU law

" (1) All such rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Treaties, and all such remedies and procedures from time to time provided for by or under the Treaties, as in accordance with the Treaties are without further enactment to be given legal effect or used in the United Kingdom shall be recognised and available in law, and be enforced, allowed and followed accordingly; and the expression "enforceable EU right" and similar expressions shall be read as referring to one to which this subsection applies."

" Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital."

" Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.

"Companies or firms" means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non- profit-making."

"Article 63

1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.

Article 64

1. The provisions of Article 63 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment — including in real estate — establishment, the provision of financial services or the admission of securities to capital markets. ...

Article 65

1. The provisions of Article 63 shall be without prejudice to the right of Member States:

a. to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested; ....

2…

3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63."

"In this Nomenclature, capital movements are classified according to the economic nature of the assets and liabilities they concern, denominated either in national currency or in foreign exchange.

The capital movements listed in this Nomenclature are taken to cover:

This Nomenclature is not an exhaustive list for the notion of capital movements — whence a heading XIII — F. ‘Other capital movements — Miscellaneous'. It should not therefore be interpreted as restricting the scope of the principle of full liberalization of capital movements as referred to in Article 1 of the Directive.

(a)          a company which is within the charge to corporation tax because it is resident in the UK or carries on a trade in the UK through a permanent establishment is described as being "within the UK tax net" and, correspondingly, a company which is within the charge to tax on all or part of its net income, profits or gains in another Member State is described as being "within the tax net" of that Member State; and

(b)          since, by virtue of the EEA Agreement, the EU freedoms extend to all states which are within the EEA, references to the "EU" and to a "Member State" should respectively be treated as including the parts of the EEA which are not within the EU and to states within the EEA which are not Member States. 

Discussion

General overview

(a)    the freedoms set out in Articles 49 and 63 TFEU are directly effective in the UK and each of those freedoms is capable of being relied upon by a taxpayer in a case where the UK's domestic legislation restricts the relevant freedom - see Section 2 of the ECA;

(b)   in that context, if the UK's domestic legislation which restricts a freedom gives rise to a tax liability for a person (A) other than the person whose freedom has been restricted (B), then A is entitled to rely on the fact that B's freedom has been restricted in order to avoid the adverse tax consequence which flows from that restriction - see Philips at paragraph [39] and Felixstowe at paragraphs [22] and [23];

(c)    domestic legislation which prohibits, impedes or renders less attractive the exercise of a freedom must be regarded as a restriction on that freedom - see NGI at paragraph [36];

(d)   for that purpose, domestic legislation should be regarded as prohibiting, impeding or rendering less attractive the exercise of a freedom as long as it is capable of doing so - it is not necessary to show that the domestic legislation in question has actually had the effect of prohibiting, impeding or rendering less attractive the exercise of the relevant freedom - see Thin Cap at paragraph [62];

(e)    domestic legislation of a Member State restricts the freedom of establishment of a resident of another Member State if, inter alia, it subjects the subsidiaries of that person to a less favourable tax treatment than subsidiaries of a resident of the first-mentioned Member State - see Oy AA at paragraphs [30] to [43];

(f)    where a Member State restricts an EU freedom, that restriction may be justified if the situation in which the restriction arises is not objectively comparable to the situation which would have pertained if no other Member State had been involved - see Germany at paragraph [60], LabTec at paragraph [38] and Class IV ACT at paragraphs [57] to [62];

(g)   where a Member State restricts an EU freedom, that restriction may be justified by overriding reasons in the public interest.  These include the objective of ensuring the balanced allocation of taxing powers between the Member States - see NGI at paragraphs [45], [46] and [94], LabTec at paragraphs [43] and [47] and Panayi at paragraphs [53] and [56];

(h)   where a Member State seeks to rely on the objective of the balanced allocation of taxing powers in order to justify a restriction, the domestic legislation in issue should be appropriate to ensuring the attainment of the objective in question and should not go beyond what is necessary in order to attain that objective.  In other words, the restriction should be proportionate - see NGI at paragraph [50]; and

(i)     if the domestic legislation in issue either give rises to a restriction on the relevant freedom which is unjustified, or a restriction which, whilst being justified, goes beyond what is proportionate, then the relevant national court must either construe the domestic legislation in a manner which is consistent with the freedom (the doctrine of "conforming interpretation") or, if a conforming interpretation is not possible, disapply the relevant provisions to the relevant extent - see Fleming at paragraph [25].

(a)    the fact that the Disposal was precluded from falling within the Group Transfer Rules and therefore gave rise to a requirement for the Appellant to make an immediate payment of the whole of the corporation tax liability of the Appellant in respect of the disposal of the shares in Galleon by the Appellant to its parent company, JTIH, and would not have given rise to such a requirement for the Appellant if JTIH had been a UK resident parent company, means that the Group Transfer Rules create a restriction on JTIH's freedom of establishment - that is to say, JTIH's freedom to establish the Appellant in the UK;

(b)   a charge to corporation tax in respect of the gain which had accrued within the Appellant in respect of the shares in Galleon up to the date of the disposal cannot be justified on the grounds that the situation involving JTIH, as a Dutch resident company outside the UK tax net, in relation to that transfer was not objectively comparable to the situation which would have pertained if JTIH had been within the UK tax net;

(c)    however, that charge to corporation tax can be justified by overriding reasons in the public interest - namely, the objective of ensuring the balanced allocation of taxing powers between the Member States;

(d)   nevertheless, requiring the whole of that corporation tax liability to be paid immediately went beyond what was necessary in order to attain that objective.  The UK legislation should have allowed for the Appellant to have an option to defer the obligation to pay the tax;

(e)    as for the terms and extent of that deferral, given that, in their application to intra-group disposals of assets where the assets remain within the UK tax net, the Group Transfer Rules provide for deferral until the relevant assets are the subject of a disposal outside the group or cease to remain within the UK tax net,  the Group Transfer Rules should be given a conforming interpretation so as to provide for an intra-group disponor of an asset in circumstances where the freedom would be restricted by an immediate charge to tax (in this case, the Appellant) to have an option to defer paying the corporation tax until the asset in question (in this case, the shares in Galleon) are the subject of a disposal outside the group or sub-group of which the non-UK resident but EU resident parent company (in this case, JTIH) is the parent company; and

(f)    in the alternative, since there is more than one way of achieving a proportionate restriction on the freedom, the question of which restriction to apply is a matter which must necessarily be left to Parliament and is not within the competence of the UK courts, with the result that the only appropriate remedy in this case is the disapplication of part of the UK legislation.

(a)          even though the transferee in relation to the 2011 Disposal, JTISA, was resident outside the EU, the fact that the Disposal was precluded from falling within the Group Transfer Rules and therefore gave rise to a requirement for the Appellant to make an immediate payment of the whole of the corporation tax liability of the Appellant in respect of the disposal of the Brands and related assets to a sister company resident outside the UK, and would not have given rise to such a requirement for the Appellant if that sister company had been resident in the UK, means that the UK legislation creates a restriction on JTIH's freedom of establishment - that is to say, JTIH's freedom to establish the Appellant in the UK;

(b)          it follows that the analysis set out above in relation to the 2014 Disposal is equally true of the 2011 Disposal. In terms of justification and proportionality, the fact that Switzerland is outside the EU and was not party to Council Directive 2010/24/EU concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (the "Multilateral Convention") at the time of the 2011 Disposal does not change the analysis because (i) first, there is a double tax treaty between the UK and Switzerland, Article 25 of which has been in effect since 1 January 2011 and provides for exchanges of information between the two jurisdictions; (ii) secondly, JTIH, the parent company of JTISA, is resident in the Netherlands and was therefore within the scope of the Multilateral Convention at the time of the 2011 Disposal; and (iii) thirdly, the disponor of the intangibles, the Appellant, remains within the UK (so that the deferred corporation tax liability would still be capable of being enforced against it) and has undertaken to provide the Respondents with an annual statement confirming that the intangibles either remain within the sub-group headed by JTIH or have left that sub-group;

(c)          in the alternative, the fact that the Disposal was precluded from falling within the Group Transfer Rules and therefore gave rise to a requirement for the Appellant to make an immediate payment of the whole of the corporation tax liability of the Appellant in respect of the disposal of the Brands and related assets to a sister company resident outside the UK and would not have given rise to such a requirement for the Appellant if that sister company had been resident in the UK means that the UK legislation creates a restriction on the freedom of the Appellant and/or JTIH to move capital; and

(d)         in that regard, Article 63 TFEU is clearly, on its terms, capable of applying to movements of capital to jurisdictions outside the EU.  In addition, even if JTIH were to be precluded from relying on the freedom to move capital in this instance - either (i) because CJEU case law suggests that, where circumstances potentially constitute a restriction on both the freedom of establishment and the freedom to move capital, then, if those circumstances involve a relationship of parent and subsidiary, only the freedom of establishment should be considered or (ii) because the "standstill" provisions in Article 64 might be regarded as precluding reliance by JTIH on its freedom to move capital in the context of a direct investment in JTISA– the same does not hold true for the Appellant, as its relationship with JTISA is that of one subsidiary of a common parent company to another.

(a)          although the requirement to make an immediate payment of the whole of the corporation tax liability in respect of the disposal of the shares in Galleon by the Appellant to its Dutch resident parent company (JTIH)  is a restriction on JTIH's freedom of establishment - that is to say, JTIH's freedom to establish the Appellant in the UK - that restriction is justified because the situation involving JTIH, as a non-UK resident company outside the UK tax net, and the situation which would have pertained if JTIH had been a UK resident company are not objectively comparable.  In particular, as Section 171, when it applies to a disposal to a UK resident company, provides for the transferee to acquire the asset at an amount equal to the base cost of the disponor, a transferee which is outside the UK tax net is not in an objectively comparable situation to that of a transferee which is within the UK tax net;

(b)          even if the restriction which the Group Transfer Rules create were not to be regarded as being justified on the basis of the lack of objective comparability, that restriction is both justified and proportionate because (i) a charge to corporation tax on the gain which has accrued on the shares in Galleon in the hands of the Appellant is necessary to secure the balanced allocation of taxing powers; and (ii) as the gain in question has been realised by the Appellant, by virtue of the Appellant's having disposed of the shares in Galleon for full consideration in cash, requiring an immediate payment of the whole of the corporation tax liability is proportionate.  In that regard, the Respondents maintain that the various decisions of the CJEU to the effect that the right of the taxpayer to be given an option to defer the payment of the taxes arising when assets leave the tax net of a Member State relate to unrealised gains as opposed to realised gains, and are therefore distinguishable from the circumstances which are in issue in the Appeals;

(c)          if requiring the immediate payment of the whole of the corporation tax liability is not proportionate, then, as it has been held by the CJEU to be proportionate in the case of unrealised gains and UK legislation should not be amended beyond what is necessary in order to give effect to the relevant  freedom, a proportionate restriction would be to give the intra-group disponor of an asset in circumstances where the freedom would be restricted by an immediate charge to tax (in this case, the Appellant) an option to pay the tax in question in instalments in the same manner as if the disponor had itself ceased to be within the UK tax net while continuing to hold the asset which was the subject of the intra-group disposal;

(d)         to give effect to that proportionate restriction, a conforming interpretation should be given to the payment provisions in the TMA so as to provide for the disponor of an asset in circumstances where the freedom would be restricted by an immediate charge to tax to have an option to pay the corporation tax liability in instalments on the same terms as if the disponor had ceased to be within the UK tax net and become subject to the UK exit charge in respect of that asset;

(e)          it is not appropriate to apply the conforming interpretation of the UK legislation in the manner proposed by the Appellant because that (i) would be inconsistent with the existing CJEU case law in which provision for an option to pay exit taxes in instalments has been held to be proportionate; (ii) would go considerably further than is necessary to render the UK legislation compatible with the freedom of establishment; and (iii) would be contrary to the grain (or thrust) of the UK's domestic legislation as a whole - for example, there is no other provision in the UK's domestic legislation for a tax liability (as opposed to a gain) to be fixed and then deferred indefinitely and the grain (or thrust) of the Group Transfer Rules is that tax should be payable immediately on any gain arising on an intra-group disposal made to a transferee which is outside the UK tax net; and

(f)           if a conforming interpretation is not possible, then the same outcome can be obtained by way of a "temporal disapplication" of the provision in Section 171 which limits the application of the Group Transfer Rules to intra-group disposals to transferees within the UK tax net.

(a)    none of the EU freedoms is engaged;

(b)   as regards the freedom of establishment, JTIH does not have a freedom of establishment in relation to JTISA because JTISA is resident outside the EU and the corporation tax liability to which the 2011 Disposal gave rise would have arisen even if JTIH had been a UK resident company so that the Group Transfer Rules do not create a restriction on JTIH's freedom to establish the Appellant in the UK;

(c)    as regards the freedom to move capital, CJEU case law shows that, in a group situation, the only freedom which needs to be considered is the freedom of establishment and the freedom to move capital is irrelevant. In any event, even if it were permissible to consider in this case whether or not the Group Transfer Rules create a restriction on the freedom to move capital, (i) the only movements of capital made by JTIH were its direct investments in JTISA (and therefore the standstill in Article 64 of the TFEU for restrictions existing under national law on 31 December 1993 applied) and (ii) the disposal of intangibles for full consideration by one subsidiary in a group to another does not itself amount to a movement of capital (and therefore the Disposal did not amount to a movement of capital by the Appellant to JTISA).  In addition, so far as both bases for arguing that the 2011 Disposal gave rise to movements of capital, the UK is permitted by the terms of Article 65 to restrict the freedom to do so because JTISA was not in an objectively comparable situation to the situation of a transferee which was within the UK tax net;

(d)    even if one of the freedoms was engaged, the restriction created by the Group Transfer Rules is justified by the fact that the situation involving JTISA, as a company outside the UK tax net, was not objectively comparable to the situation which would have pertained if JTISA had been within the UK tax net (as regards the application of Section 171) for the same reason as in relation to the 2014 Disposal and (as regards the application of Section 775) because the provision operates by specifying that the transferee steps into the shoes of the disponor and a transferee which is outside the UK tax net cannot do that; and

(e)     even if the restriction to which the UK legislation gives rise were not to be regarded as being justified on the basis of the lack of objective comparability, the same arguments as apply in relation to justification and proportionality in the context of the 2014 Disposal apply in the context of the 2011 Disposal.

Questions to be addressed in relation to each Disposal

(a)          first, which freedoms need to be considered in relation to the application of the Group Transfer Rules to the relevant Disposal? Is it the freedom of establishment set out in Article 49 of the TFEU or the freedom to move capital in Article 63 of the TFEU or both?

(b)          secondly, if one or both of the freedoms needs or need to be considered, do the Group Transfer Rules create a restriction on the relevant freedom or freedoms?

(c)          thirdly, if the Group Transfer Rules create a restriction on the relevant freedom or freedoms, can that restriction be justified on the basis that the circumstances of the transferee in the particular case are not objectively comparable to those which would have pertained if the transferee had been within the UK tax net?

(d)         fourthly, if the Group Transfer Rules create a restriction on the relevant freedom or freedoms and the restriction cannot be justified on the basis of the lack of objective comparability, is the relevant restriction justified by overriding reasons in the public interest - namely, the balanced allocation of taxing powers between Member States?

(e)          fifthly, if the relevant restriction on the freedom is justified, is the restriction proportionate - that is to say, does it go beyond what is necessary to achieve the objective of preserving the balanced allocation of taxing powers? and

(f)           sixthly, if the relevant restriction on the freedom is not proportionate, how should the UK courts respond to the disproportionate restriction on the freedom which is created by the legislation? In other words, is it possible for the UK courts to adopt a conforming interpretation of any part of the UK legislation in order to achieve compliance with EU law or should some part of the UK legislation be disapplied, whether in whole or in part, in order to achieve that compliance?

Summary of conclusions

(a)          in relation to the 2014 Appeal:

-          the fact that the Disposal gave rise to an immediate liability to tax which would not have arisen if JTIH had been within the UK tax net means that the Group Transfer Rules create a restriction on JTIH's freedom of establishment;

-          that restriction is not justified on the basis that JTIH is not in an objectively comparable situation to that in which it would have been if it had been within the UK tax net;

-          however, the restriction is justified by reference to overriding reasons in the public interest - namely, the objective of securing the balanced allocation of taxing powers between Member States;

-          nevertheless, in requiring the tax in question to be paid immediately, the restriction goes further than is proportionate;

-          the restriction would be proportionate if it were to provide for the tax in question to be paid in instalments;

-          however, as there are various possible instalment payment bases which would be proportionate in this context, it is not within the competence of the UK courts to remedy the existing disproportionate restriction by selecting one of those options and applying the doctrine of conforming interpretation to treat the selected option as incorporated in the legislation;

-          therefore, it is necessary to disapply the existing exclusion from the Group Transfer Rules for intra-group disposals to transferees which are outside the UK tax net in circumstances where that exclusion constitutes a restriction on the freedom of establishment, with the result that Section 171 should apply in those circumstances even though the transferee is not within the UK tax net; and

-          in consequence, the EU Law Issue is determined in favour of the Appellant and the 2014 Appeal is upheld; and

(b)          in relation to the 2011 Appeal:

-          it is not necessary to consider whether the fact that the Disposal gave rise to an immediate liability to tax which would not have arisen if JTISA had been within the UK tax net means that the Group Transfer Rules create a restriction on JTIH's or the Appellant's freedom to move capital;

-          however, it is necessary to consider whether that fact means that the Group Transfer Rules create a restriction on JTIH's freedom to establish the Appellant in the UK;

-          the fact that the Disposal gave rise to an immediate liability to tax which would not have arisen if JTISA had been within the UK tax net does not mean that the Group Transfer Rules create a restriction on JTIH's freedom of establishment in the UK because the same liability would have arisen even if JTIH had been within the UK tax net; and

-          as a result, the EU Law Issue is determined in favour of the Respondents and therefore the Valuation Issue in the 2011 Appeal needs now to be addressed.

The 2014 Disposal

Which freedoms?

(a)          a company established in one Member State with a holding in the capital of a company in another Member State giving it definite influence over the second-mentioned company's decisions and allowing it to determine the second-mentioned company's activities is exercising its right of establishment; and

(b)          legislation which is targeted only at relations within a group of companies primarily affects that right of establishment and any restrictive effects on the free movement of capital "must be seen as an unavoidable consequence of any restriction on freedom of establishment and do not justify an independent examination of that legislation in the light of [Article 63]" (see Thin Cap at paragraphs [33] and [34], Cadbury Schweppes at paragraphs [31] to [33] and FII 2 at paragraphs [89] to [92]).

Is there a restriction?

Can the restriction be justified by the lack of objective comparability?

"[58] Where the company making the distribution and the shareholder to whom it is paid are not resident in the same Member State, the Member State in which the company making the distribution is resident, that is to say the Member State in which the profits are derived, is not in the same position, as regards the prevention or mitigation of a series of charges to tax and of economic double taxation, as the Member State in which the shareholder receiving the distribution is resident.

[59] It must be held in that regard, first, that to require the Member State in which the company making the distribution is resident to ensure that profits distributed to a non-resident shareholder are not liable to a series of charges to tax or to economic double taxation, either by exempting those profits from tax at the level of the company making the distribution or by granting the shareholder a tax advantage equal to the tax paid on those profits by the company making the distribution, would mean in point of fact that that State would be obliged to abandon its right to tax a profit generated through an economic activity undertaken on its territory.

[60] Secondly, as regards a procedure for preventing or mitigating economic double taxation by the grant of a tax advantage to the ultimate shareholder, it must be pointed out that it is usually the Member State in which the latter is resident that is best placed to determine the shareholder's ability to pay tax (see, to that effect, Schumacker, paragraphs 32 and 33, and D., paragraph 27). Likewise, in the case of shareholdings to which Directive 90/435 applies, Article 4(1) of that directive requires the Member State of the parent company which receives profits distributed by a subsidiary which is resident in another Member State, and not the latter State, to avoid a series of charges to tax, either by refraining from taxing such profits or by taxing such profits while authorising that parent company to deduct from the amount of tax due that fraction of the corporation tax paid by the subsidiary which relates to those profits and, if appropriate, the amount of the withholding tax levied by the Member State in which the subsidiary is resident."

"[24] However, the situation of a resident parent company wishing to form a single tax entity with a resident subsidiary and the situation of a resident parent company wishing to form a single tax entity with a non-resident subsidiary are objectively comparable with regard to the objective of a tax scheme such as that at issue in the main proceedings in so far as each seeks to benefit from the advantages of that scheme, which, in particular, allows the profits and losses of the companies constituting the single tax entity to be consolidated at the level of the parent company and the transactions carried out within the group to remain neutral for tax purposes."

Can the restriction be justified by the need for the balanced allocation of taxing powers?

The exit tax cases

NGI

"39. The Spanish, French and Portuguese Governments further submit that a company such as the applicant in the main proceedings does not suffer any disadvantage in comparison with a company that transfers its place of management within a Member State. In view of the fact that the exchange rate gain in Netherlands guilders on a claim expressed in sterling disappeared when the place of effective management of National Grid Indus was transferred to the United Kingdom, that company was, in the view of those governments, taxed on a capital gain that had been realised. A transfer of the place of management within the Member State concerned, by contrast, would not have given rise to the realisation of any capital gains.

40. That argument must be rejected. The tax at issue in the main proceedings is not charged on realised capital gains. The exchange rate gain that was taxed in the context of those proceedings relates to an unrealised capital gain which did not produce any income for National Grid Indus. Such an unrealised capital gain would not have been taxed if National Grid Indus had transferred its place of effective management within Netherlands territory."

Portugal 2

"31 So far as concerns the existence of any justification for the restriction on freedom of establishment that has been found and the justification's proportionality, the Court held in National Grid Indus, paragraph 86, that Article 49 TFEU precludes legislation of a Member State which prescribes the immediate recovery of tax on unrealised capital gains relating to assets of a company transferring its place of effective management to another Member State at the very time of that transfer.

32 Furthermore, as is apparent from paragraph 73 of the judgment in National Grid Indus, national legislation offering a company transferring its place of effective management to another Member State the choice between, first, immediate payment of the amount of tax and, secondly, deferred payment of the amount of tax, possibly together with interest in accordance with the applicable national legislation, would constitute a measure less harmful to freedom of establishment than the measures at issue in the main proceedings."

Denmark

"33 However, the Kingdom of Denmark points out that the position taken by the Court in the National Grid Indus judgment, above, assumes that the assets being transferred will actually be realised.  On the other hand, when this tax on unrealised capital gains is generated by assets that are not intended to be realised after their transfer, it would be proportionate to the objective being pursued, consistent with ensuring that taxation power distribution between Member States be preserved, in order to demand the recovery of tax when a company transfers its assets to another Member State.

34 Furthermore, the Kingdom of Denmark maintains that, in the absence of any harmonisation of tax regulations when transferring assets between Member States, there are no other less radical ways of achieving this objective satisfactorily.

35 As a preliminary point, please note that the scope of the principle expressed in the National Grid Indus judgment, above, is not limited to unrealised capital gains made in the territory of a Member State and realised after the transfer of the assets to another Member State (see National Grid Indus judgment, paragraphs 68 and 70).

36 Please also note that since the sum of unrealised capital gains tax on the assets is definitively determined when a company transfers those assets to another Member State, the fact that some of the said assets may not be assigned after their transfer to the host State does not in itself deprive the State of origin of the possibility of recovering that sum.

37 Indeed, since Member States have the right to tax capital gains generated when the assets in question were on their territory, they have the power to provide for a cause for this taxation other than the effective transfer, in order to guarantee the taxation of assets which are not destined for transfer, and less detrimental to the freedom of establishment than the levy at the time of transfer.

38 The fact that solutions chosen in other Member States may differ from the one the Kingdom of Denmark is likely to use does not affect the possibility of the Kingdom of Denmark receiving tax on unrealised capital gains on those assets after the transfer of an asset to another Member State, provided that the definitive amount of tax is determined at the time of said transfer."

DMC

Germany

"71. In the present case, the fact that either an unrealised capital gain or a realised capital gain is at issue is irrelevant in this regard. What is of importance is that, as regards one or other of those capital gains, similar transactions, carried out in the purely domestic context of a Member State, unlike a cross-border transaction, did not result in the immediate taxation of those capital gains."

LabTec

Panayi

A Oy

Main points arising from the exit tax cases

(a)          all of the cases related to unrealised gains in the broadest sense of the term.  By that I mean that, in a number of the cases, such as NGI,  Portugal 2, Denmark, LabTec and Panayi, there had been no disposal of the assets in question - there had merely been a change of residence of the entity holding the assets or a movement of assets within the same entity - whereas, in other cases, the gains were technically realised but had generated no cash.  For example, in both DMC and A Oy, there had been disposals in return for shares, whilst in Germany, there had been a disposal for cash but that cash had been reinvested in replacement assets;

(b)            it is clear from the comments of Advocate General Kokott at paragraphs [39] to [41] of her opinion in A Oy  - to the effect that, whilst incorporation is technically a realisation, it is "not a genuine realisation of the value of the permanent establishment by way of sale but merely a restructuring measure" - that, even in those cases where there had technically been a realisation, the relevant circumstances were being seen as not involving a realisation;

(c)          none of the decisions states expressly that the result of the case would have been different if the case had involved realised gains.  There are various references in the course of the decisions to the fact that the gains in question were unrealised and that the taxpayer in question had suffered a cash flow disadvantage as a result of the imposition of the tax liability - see, for example, NGI at paragraphs [37], [39] and [40], Portugal 2 at paragraphs [27] and [28], Denmark at paragraphs [24], [29] and [32] and LabTec at paragraphs [36] and [37].  One might infer from those references that the decision might have been different if the case had involved realised gains. However, those references might equally lead to the inference that the critical factor was not so much that the relevant gains were unrealised but rather the fact that the imposition of tax in those circumstances placed the company at a cash flow disadvantage relative to the similar circumstances with which those circumstances were being compared - that is to say, circumstances in which no cross-border element existed;

(d)         Germany related to circumstances in which assets had been realised, albeit that the proceeds of realisation had been reinvested in replacement assets.  In paragraph [71] of the decision, the CJEU might have said that, because it was dealing with circumstances in which the proceeds of sale of the initial assets had been reinvested in the replacement assets, the circumstances should be equated to the circumstances pertaining in the cases relating to tax on unrealised gains. Had it done so, then Germany would have been similar to DMC, in that, in both cases, the CJEU would have been treating, as "unrealised", the profits arising on a realisation which did not ultimately give rise to cash proceeds. However, the CJEU instead chose to say expressly that whether or not the circumstances under consideration related to realised or unrealised profits was irrelevant.  All that mattered was that the national legislation in question was not treating similar transactions in the same way purely because one of them involved a cross-border element;

(e)          in Panayi, although the gains in respect of the shares were unrealised at the point of migration, the shares were the subject of a disposal before the date on which the exit tax became due.  The CJEU expressly rejected the proposition that that might affect its conclusion that the existing legislation was not justified.  It said:

"That finding cannot be called into question by the fact that, in the circumstances of the main proceedings, the gains were made after the establishment of the amount of the tax, but before that tax became payable, given that the disproportionality of the legislation at issue in the main proceedings is due to the fact that that legislation makes no provision for the taxpayer being able to defer the time when the tax payable is paid" (see paragraph [60]).

Thus, the fact that the trustees had the ability to pay the exit tax when that tax became due (as a result of the post-exit disposal) was not relevant to the question of whether the charge to tax was disproportionate.  As noted in paragraph [56] of the opinion of Advocate General Kokott in Panayi, the existing regime was nevertheless still disproportionate because the trustees were obliged to pay the tax one year earlier than they would have been if no change in residence had occurred and were therefore being treated disadvantageously in comparison with trusts which remained resident in the UK and then made the disposal; and

(f)           in A Oy, the CJEU held that the mere fact that the national legislation in question, in conformity to Article 10(2) of Council Directive 90/434/EEC (the "Mergers Directive") provided for a tax credit to be given to the taxpayer against the Finnish tax for the tax which, but for the Mergers Directive, would have been payable in the jurisdiction of the permanent establishment did not affect its conclusion that the national legislation in question was disproportionate "given that the disproportionality of [the national legislation in question] does not derive from the amount of tax due but from the fact that it makes no provision for the taxpayer to defer the time at which it is collected" (see paragraph [38]).  This is the equivalent of the finding in Panayi to the effect that the fact that the taxpayer had realised the assets in question by the time that the exit tax became due did not affect the conclusion that requiring the immediate payment of tax because of the exit was disproportionate.

(a)          the only exit tax case which refers expressly to deferral until realisation of the assets in question is NGI at paragraphs [68] et seq.;

(b)          in Portugal 2, the CJEU does not at any point say expressly that, when it is referring to deferral, it is referring to deferral until realisation (as opposed to deferral by allowing for the payment of tax by instalments).  Whilst it might be inferred from the references to NGI in paragraphs [31] and [32] of the decision in Portugal 2 that that is what the CJEU intended, the references in paragraphs [24] of Advocate General Mengozzi's opinion in that case to the deferral of tax until realisation of the assets, the arguments made by the Governments of various Member States (which are recorded in paragraph [33] of that opinion) to the effect that the decision in NGI should be confined to financial assets and should not extend to assets which are not intended to be realised and the suggestion by the Advocate General in paragraph [68] of his opinion to the effect that a proportionate justification for the restriction might entail instalment payments instead of deferral until realisation suggest that the references to deferral in the CJEU decision in Portugal 2 might well be to a basis of deferral other than deferral until realisation;

(c)          in Denmark, the CJEU in paragraphs [33] to [38] expressly states for the first time that the deferral principle laid down in NGI does not in all cases require deferral until the realisation of the assets in question and that an alternative basis of deferral may also be acceptable;

(d)         DMC was the first exit tax case where the national legislation in question already provided for a deferred payment of tax. The deferred payment of the tax for which the national legislation provided was an instalment payment basis, a basis not envisaged by the decision of the CJEU in NGI but clearly discussed during the course of the proceedings in Portugal 2 and then flagged by the CJEU in Denmark as a possible proportionate restriction on the freedom;

(e)          in Germany, the CJEU did not make any comment on the fact that, whereas it had stipulated in NGI that, in order to be proportionate, the legislation in question needed to provide for an option to defer until realisation, it had stipulated in DMC that legislation providing an option to defer by making payments in instalments was proportionate.  Instead, it simply referred to both of those cases together as stipulating that an option for deferral was necessary in order for the legislation to be proportionate (see paragraph [67]);

(f)           similarly to DMC, LabTec was a case where the existing practice of the German tax authorities provided for the tax to be deferred and stipulated that the deferral was on an instalment payment basis.  However, that instalment basis was different from the one pertaining in DMC as it allowed for the instalments to be paid over ten years and not simply five. The CJEU, following paragraphs [72] and [73] of the opinion of Advocate General Jääskinen in that case, noted that, since a five-year instalment payment basis had been held to be proportionate in DMC, it followed that a ten-year instalment payment basis must also be proportionate. It is clear from the observations in paragraphs [67] to [69] of the opinion of Advocate General Jääskinen in LabTec that it is now well-established that a Member State is not required to provide for deferral on a realisation basis and that an instalment payment basis of deferral is a proportionate alternative;

(g)          in common with its decision in Germany, in Panayi, the CJEU again drew no distinction between deferral until realisation and deferral by way of a payment in instalments (see paragraph [57]); and

(h)          in A Oy, in describing the need for the national legislation to provide an option for deferral, the CJEU again did not distinguish between deferral until realisation and deferral by way of the payment of instalments (see paragraph [37]). It is true that, in paragraphs [35] and [36] of its judgment, the CJEU referred to the administrative burden necessarily associated with tracing the transferred assets when it refers to deferral, but there are two reasons why this does not necessarily mean that the CJEU is contemplating that deferral until realisation is the only deferral option.  The first is that, in the paragraphs in question, the CJEU is merely purporting to summarise the previous case law - NGI in paragraph [35] and Germany in paragraph [36] - and the second is that, even in the case of deferral by way of the payment of instalments, there will generally be provision for acceleration of the instalments in the case of a realisation - as is the case in Schedule 3ZB to the TMA - and therefore tracing remains a relevant consideration in that case too.  It is clear from paragraphs [38], [42] and [44] of the opinion of Advocate General Kokott in A Oy that she considered that deferral by way of the payment of instalments over five years would be proportionate.

Is the restriction proportionate?

(a)           this is a case involving realised gains and the existing CJEU case law which stipulates that proportionality requires a Member State to offer an option to defer payment of the tax relates solely to unrealised gains; and

(b)          in similar vein, since the Appellant realised cash from the disposal, it had the ability to pay all of the tax arising from the disposal immediately.

 "The no gain/no loss rule in TCGA92/S171(1) ensures that assets can generally be moved around a group of companies without any immediate capital gains consequences[.]). This recognises that business activities carried on within the overall economic ownership of a corporate group, within the charge to corporation tax, should, in broad terms, be tax neutral. This is achieved by fixing both the consideration received for the asset by the transferor and the consideration given for the asset by the transferee. The transferor has neither chargeable gain nor allowable loss. The transferee effectively takes over the transferor's capital gains cost, augmented by indexation allowance as appropriate….Therefore a chargeable gain or allowable loss will accrue only when an asset is disposed of outside the group (or the part of the group that is chargeable to corporation tax on chargeable gains) and that gain or loss will reflect the economic gain or loss throughout the group's period of ownership…"

and has been recognised by HM Treasury when it said the following in its consultation document of February 2010 in relation to simplifying the chargeable gains tax rules:

 "1.8 As far as possible, the capital gains rules for groups of companies are intended to recognise that a group of companies operates as a single economic entity. This principle underpins the ‘no-gain-no-loss' asset transfer rule [f/n: Section 171, Taxation of Chargeable Gains Act 1992], which allows companies within the same corporate group to transfer assets between one another on a tax-neutral basis."

How should the national court respond in the case of a restriction on an EU freedom which is disproportionate?

The doctrine of conforming interpretation

"[30]  From this it follows that the interpretative obligation decreed by s 3 is of an unusual and far-reaching character. Section 3 may require a court to depart from the unambiguous meaning the legislation would otherwise bear. In the ordinary course the interpretation of legislation involves seeking the intention reasonably to be attributed to Parliament in using the language in question. Section 3 may require the court to depart from this legislative intention, that is, depart from the intention of the Parliament which enacted the legislation. The question of difficulty is how far, and in what circumstances, s 3 requires a court to depart from the intention of the enacting Parliament. The answer to this question depends upon the intention reasonably to be attributed to Parliament in enacting s 3.

[31]  On this the first point to be considered is how far, when enacting s 3, Parliament intended that the actual language of a statute, as distinct from the concept expressed in that language, should be determinative. Since s 3 relates to the "interpretation" of legislation, it is natural to focus attention initially on the language used in the legislative provision being considered. But once it is accepted that s 3 may require legislation to bear a meaning which departs from the unambiguous meaning the legislation would otherwise bear, it becomes impossible to suppose Parliament intended that the operation of s 3 should depend critically upon the particular form of words adopted by the parliamentary draftsman in the statutory provision under consideration. That would make the application of s 3 something of a semantic lottery. If the draftsman chose to express the concept being enacted in one form of words, s 3 would be available to achieve Convention-compliance. If he chose a different form of words, s 3 would be impotent. 

[32]  From this the conclusion which seems inescapable is that the mere fact the language under consideration is inconsistent with a Convention-compliant meaning does not of itself make a Convention-compliant interpretation under s 3 impossible. Section 3 enables language to be interpreted restrictively or expansively. But s 3 goes further than this. It is also apt to require a court to read in words which change the meaning of the enacted legislation, so as to make it Convention-compliant. In other words, the intention of Parliament in enacting s 3 was that, to an extent bounded only by what is "possible", a court can modify the meaning, and hence the effect, of primary and secondary legislation. 

[33]  Parliament, however, cannot have intended that in the discharge of this extended interpretative function the courts should adopt a meaning inconsistent with a fundamental feature of legislation. That would be to cross the constitutional boundary s 3 seeks to demarcate and preserve. Parliament has retained the right to enact legislation in terms which are not Convention-compliant. The meaning imported by application of s 3 must be compatible with the underlying thrust of the legislation being construed. Words implied must, in the phrase of my noble and learned friend Lord Rodger of Earlsferry, "go with the grain of the legislation". Nor can Parliament have intended that s 3 should require courts to make decisions for which they are not equipped. There may be several ways of making a provision Convention-compliant, and the choice may involve issues calling for legislative deliberation."

"[88]  The decision in the  Ghaidan case is a powerful statement of the court's preparedness to interpret legislation so that it is compatible with human rights. The speeches, all of which repay careful study, contain extremely valuable guidelines. The House of Lords has recognized the force of the mandatory obligation in s 3. However, s 3 permits only interpretation, not the rewriting of legislation which goes beyond mere interpretation. I would add that in s 3 the words "in a way which is compatible with the Convention rights" make it clear that the courts have a choice as to precisely how to interpret the legislation to achieve the objective in s 3, namely that, where possible, the legislation should be compatible with human rights.

[89]  The critical point made by the House of Lords in the Ghaidan case can be found in the passage from the speech of Lord Nicholls which I have set out above. Lord Nicholls accepts that the effect of interpretation in accordance with s 3 of the 1998 Act may be to change the meaning of the legislation but, as he explains, the meaning adopted by the court must not conflict with a fundamental feature of the legislation. He adopts the words of Lord Rodger that the interpretation chosen by the court must "go with the grain of the legislation". Lord Nicholls, Lord Steyn and Lord Rodger all accepted that there would be occasions when the courts could not adopt an interpretation that would make the legislation compatible with Convention rights because that would involve making policy choices which the court was not equipped to make (see [33] to [35] per Lord Nicholls, [49] per Lord Steyn and [115] per Lord Rodger). It is also clear from the Ghaidan case that the interpretation of legislation under s 3 or the Marleasing principle may involve a substantial departure from the language used though it will not involve a departure from the fundamental or cardinal features of the legislation. It is possible to read the legislation up (expansively) or down (restrictively) or to read words into the legislation. The question of whether s 3 can be applied does not depend on whether it is possible to solve the problem by a simple linguistic device.

[90]  Lord Nicholls also makes it clear that there is no need to find that the statutory language should be ambiguous before interpreting the legislation so as to be compatible with Convention rights. He does not deal expressly with the possibility of Parliament making express provision in contravention of Convention rights. Mr Lasok refers to such a possibility in the context of legislation designed to implement Community legislation in his argument before us (para 60, above). So he submits that Parliament might use language which made it clear that it did not intend VAT to be imposed in a situation in which it was chargeable under the Sixth Directive. The situation which he postulates is not one in which Parliament has specifically stated that it is legislating in a manner which departs from the Sixth Directive. In the situation postulated, as it seems to me, the court's interpretative duty, whether arising under Community law or arising under s 3, is not excluded. In determining whether the solution is one of interpretation or impermissible law-making, the relevant test remains whether the interpretation that would be required to make the statute in question Convention-compliant or in this case, EU law-compliant, would involve a departure from a fundamental feature of the legislation. As I see it, the latter cannot be the case where the effect of the interpretation would be to bring the statute into conformity with the objectives of the Sixth Directive in the absence of clear statutory language to the effect that Parliament intended that there should not be such conformity."

(a)          the obligation of the UK courts to construe UK legislation consistently with EU law is broad and far-reaching;

(b)          it is not constrained by conventional rules of construction (see Lord Oliver in Pickstone at page 126B);

(c)          it does not require ambiguity in the legislative language (see Lord Nicholls in Ghaidan at paragraph [32]);

(d)         it is not an exercise in semantics or linguistics (see Lord Nicholls, Lord Steyn and Lord Rodger in Ghaidan at paragraphs [31], [35], [48], [49] and [110] to [115]);

(e)          it permits departure from the strict and literal application of the words which the legislature has elected to use (see Lord Oliver in Litster at page 577A and Lord Nicholls in Ghaidan at paragraph [31]);

(f)           it permits the implication of words necessary to comply with EU obligations (see Lord Oliver in Litster at page 577A);

(g)          the precise form of the words to be implied does not matter (see Lord Rodger in Ghaidan at paragraph [122] and Arden LJ in IDT at paragraph [114]);

(h)          any provision within the UK legislation can be the subject of the conforming interpretation and not just the provision which gives rise to the infringement of EU law (see Sir Andrew Morritt C in Vodafone 2 at paragraph [34]);

(i)            it is inevitable that the application of a conforming construction will have a retrospective effect.  That "is no more an objection in the field of conforming interpretation than it is in the case of domestic statutory construction" (see Sir Andrew Morritt C in Vodafone 2 at paragraph [56]);

(j)            on the other hand, the construction given by the UK courts must go with the grain of the legislation and not conflict with a fundamental feature of the legislation (see Lord Nicholls and Lord Rodger in Ghaidan at paragraphs [33] and [111] et seq.);

(k)          in addition, the UK courts may interpret the legislation so far as possible so that the legislation is EU law-compliant but no further (see Arden LJ in Routier at paragraph [93]); and

(l)            finally, the exercise of the interpretive obligation must not offend against the principle of legal certainty and cannot require the national court to make a decision for which it is not equipped or give rise to important practical repercussions which the court is not equipped to evaluate (see Lords Nicholls and Lord Rodger in Ghaidan at paragraphs [33] and [111] et seq.).

The submissions of the parties in relation to conforming interpretation

Conclusion in relation to conforming interpretation

Which party's conforming interpretation?

(a)          to extend to the disponor of an asset to a transferee which is outside the UK tax net but within another Member State the existing regime applicable to exit taxes under Section 59FA of, and Schedule 3ZB to, the TMA; or

(b)          to read Section 171 as enabling such a disponor to have the option to defer the tax arising by reason of the failure of the transferee to satisfy the condition in Section 171(1A)(b) of the TCGA until the asset in question leaves the group or sub-group in question,

I agree with the Respondents that their proposed conforming construction goes with the grain of the existing UK legislation whereas the Appellant's does not.

(a)          the case law of the CJEU demonstrates that a distinction must be drawn between circumstances where the existing national legislation already contains a restriction which is proportionate and circumstances where the restriction in the existing national legislation is disproportionate; or

(b)          the case law of the CJEU and/or UK case law demonstrates that, where more than one measure is available to render non-EU law-compliant national legislation compliant, the national court is obliged (or, at least, entitled) to choose the measure which least restricts the applicable EU freedom (ie the measure which does the most damage to the national legislation).

I have not been provided with any case law which supports either of the above propositions.

"65. According to National Grid Indus and the Commission, the immediate recovery of the tax at the time of the transfer of a company's place of effective management to another Member State is disproportionate. The recovery of tax at the time when the capital gains are actually realised would be a less restrictive measure than that provided for by the legislation at issue in the main proceedings, and would not endanger the allocation of powers of taxation between the Member States."

(a)          the disposal of the asset to which the tax relates;

(b)          the tenth anniversary of the end of the accounting period in which the migration occurred; and

(c)          the company's becoming subject to a relevant event,

and becomes due on (in the case of the events described in paragraph 191(a) or 191(b) above) the date of the event in question and (in the case of a relevant event) the first day after the period of nine months beginning immediately after the end of the accounting period in which the migration occurred or, if that date has already passed, the next anniversary of that date.

(a)          the company becomes subject to a relevant event; or

(b)          the company ceases to be party to the relevant loan relationship or derivative contract or disposes of the relevant intangible fixed asset (a "trigger event"),

and becomes due on (in the case of a relevant event) the date of the relevant event in question and (in the case of a trigger event) the day on which the next instalment would otherwise have been due.

(a)           extending paragraph 1 of the schedule to include intra-group disposals to transferees located outside the UK tax net but within the EEA;

(b)          in that context, applying the relevant event and trigger event definitions to events befalling the transferee instead of events befalling the migrating company; and

(c)          also in that context, construing references in the schedule to (i) the cessation of residence as references to the making of any such disposal, (ii) the migration accounting period as references to the accounting period in which the disposal occurs; (iii) the exit charge provisions to references to the gains arising as a result of the non-application of the Group Transfer Rules to such disposals; and (iv) the date on which the company ceased to be resident in the UK or the EEA state in which it has become resident as references to the date of such disposal or the EEA state of the transferee,

it should be possible for Parts 1 and 3 of the schedule to apply to such disposals, mutatis mutandis.

The role of the UK courts

(a)          the CJEU case law and the Tax Avoidance Directive suggest that it is proportionate for a Member State to provide for the payment of exit taxes by way of instalment;

(b)          there is an obvious parallel between exit taxes and taxes arising in respect of an intra-group disposal to a transferee which is outside the UK tax net;

(c)          the UK has existing legislation in place which sets out a regime for the payment of exit taxes by way of instalments; and

(d)         it would be relatively straightforward to adopt a conforming interpretation of that legislation and thereby extend it to cover taxes arising under the Group Transfer Rules in circumstances where those rules are restricting any person's freedom of establishment,

I should adopt that course of action in this case.

"Nor can Parliament have intended that s 3 should require courts to make decisions for which they are not equipped. There may be several ways of making a provision Convention-compliant, and the choice may involve issues calling for legislative deliberation."

"[58]  Third, the conforming interpretation advanced by counsel for HMRC reflects and excepts from the operation of the CFC Legislation precisely that element of it which the ECJ held to constitute the hindrance to freedom of establishment. That is, by definition, sufficiently certain for a conforming interpretation whether or not the exclusion from the exception of wholly artificial transactions is included. There can be no objection to such an exclusion for the like reason. It follows precisely the formulation of the justification for the hindrance which the ECJ found to be acceptable.

[59]  It is the case that there are likely to be other ways of achieving conformity, for example s 751A inserted into the CFC Legislation by the Finance Act 2007, and the choice of one rather than another may well involve policy decisions. But if that consideration alone could render a conforming interpretation illegitimate it would considerably restrict the occasions in which a conforming interpretation could be adopted and lead to an increase in disapplications. The choice of a conforming interpretation which faithfully follows a conclusion of the ECJ, as in this case, does not in my view trespass on the forbidden ground of legislation."

(a)          as mentioned above, Fleming was not a case relating to the ambit of the doctrine of conforming interpretation.  Instead, it related to disapplication - the action which a UK court is required to take if it is unable to render the existing UK legislation EU law-compliant by applying a conforming interpretation. This is a significant difference because a UK court has a choice as to whether or not to apply a conforming interpretation, albeit a choice which needs to be exercised within the boundaries laid down by the previous case law, as summarised in paragraphs 129 to 140 above.  In contrast, a UK court which is unable to render the existing UK legislation EU law-compliant by the application of conforming interpretation is then bound by Section 2(4) of the ECA to disapply some part of the existing UK legislation. It is this difference to which Lord Walker was referring at paragraph [62] of the decision, when he noted that "[t]he disapplication of offending legislation is the duty of the national court, even if it involves action which would otherwise be alien to the strong judicial instinct not to intrude on the province of the legislature". So the issue in Fleming was not how to interpret the existing UK legislation in a manner which made it EU law-compliant but rather the extent to which the relevant part of the existing UK legislation should be disapplied;

(b)          moreover, in Fleming, only one of the Law Lords - Lord Scott in the paragraphs set out in paragraph 202 above - held that it was beyond the competence of the court (and, for that matter, the Respondents) to specify the transitional provision which should be treated as applying to the new regulation; and

(c)          in addition, three of the Law Lords - Lord Neuberger, Lord Hope and Lord Carswell - considered that an appropriate transitional rule could be introduced in the future by the Respondents (instead of Parliament) as long as the Respondents publicised their view appropriately.

(a)           the existing restriction on the freedom of establishment is disproportionate by requiring tax to be paid immediately; and 

(b)          an option to defer that tax by allowing for payments to be made by way of instalments would be proportionate and would do less damage to the existing UK legislation than providing for the deferral of that tax until the asset leaves the relevant group or sub-group.

Disapplication

(a)          first, I have some difficulty in following how the Appellant's disapplication option 2 and the Respondents' disapplication option 2A can be said to involve a disapplication at all.  It seems to me that the result to which each of those options would give rise, whilst attractive in that it would enable the UK to tax the gain which has accrued on the asset prior to the intra-group disposal, wouldn't involve disapplying any of the existing legislation so much as amending that legislation.  As such, I consider that those options can be achieved only by way of a conforming interpretation - a remedy which I have already decided is not open to me.

In this regard, I should make it clear that, although the Respondents described their disapplication option 2A in paragraph [61] of their skeleton argument as involving the "temporal disapplication" of the relevant legislation, this is not an apt description of either their disapplication option 2A or the Appellant's disapplication option 2. A "temporal disapplication" is the type of disapplication remedy which the House of Lords was considering in Fleming.  In other words, it involved disapplying the offending regulation for a specified period of time in order to provide for transitional relief.

In contrast, in this case, both of these disapplication options do not involve a temporary suspension of the offending legislation but rather an amendment to the existing legislation to allow it to provide for the tax liability which is crystallised by the offending legislation to be deferred.  This cannot properly be described as a "temporal disapplication" or in fact a disapplication at all in any meaningful sense;

(b)          secondly, I do not follow the argument of the Appellant in relation to disapplication option 3.  If Section 171 were to be disapplied altogether, so that all intra-group disposals gave rise to tax by reference to the market value of the asset transferred, without regard to whether or not the transferee was within the UK tax net, then I do not see how the UK legislation would be restricting anyone's freedom of establishment. In that case, in relation to every intra-group disposal, the disponor would be being treated in exactly the same way regardless of whether or not the transferee was within the UK tax net and therefore there would simply be no restriction on the freedom of establishment; 

(c)          the above means that I face the unpalatable choice between disapplication option 1 - which will have the effect that the UK will be unable to tax the accrued gain on an asset which leaves the UK tax net in circumstances where imposing an immediate liability to tax would constitute a restriction on an EU freedom and which will therefore be contrary to the principle of the balanced allocation of taxing powers between Member States and give rise to an outcome for which neither party in this case has contended – and disapplication option 3 - which will have the effect of disturbing the tax treatment which is currently accorded to intra-group disposals of assets which stay within the UK tax net following the disposal;

(d)         I do not think that the exercise of this choice can be equated to the process of exercising a choice which I considered (in relation to applying a conforming interpretation of UK law) to be solely a matter for Parliament and beyond the competence of the UK courts. 

In the first place, once a conforming interpretation of UK law has been discounted, I am obliged to disapply some part of the UK legislation in order to make it comply with EU law.  That is an obligation imposed on me under Section 2(4) of the ECA.  The fact that disapplication is a duty of the UK courts in these circumstances is made clear by Lord Walker in Fleming at paragraph [62] and Peter Gibson LJ in the Court of Appeal in Autologic at paragraphs [22] to [24].  In the words of Lord Walker in Fleming at paragraph [62], it is the UK court's "plain duty" in a case where UK law is not EU law-compliant to disapply the offending legislation.  This must be the case even if disapplication would give rise to a result for which neither party is contending.

Since there is a duty to disapply, it necessarily follows that, where there is more than one way of achieving EU law-compliance, each of which is equally valid, the UK court is not precluded from exercising a choice as between those disapplication options in the fulfilment of its duty. Indeed, it is arguable that the four Law Lords in Fleming who considered that they were entitled to determine the precise scope of the transitional provision in that case went further than they needed to in order to comply with that duty.  There was a clear imperative for the House of Lords in that case to disapply the new regulation because of the absence from that regulation of any transitional provision.  The Law Lords could have achieved that outcome simply by saying that the regulation would be disapplied until a proper transitional provision was later adopted by Parliament and refusing to consider alternative transitional provisions themselves.  The fact that four of the Law Lords did not do that demonstrates that, in their view, the UK courts have some latitude in the exercise of disapplication.

In any event, in this case, there are only two possible disapplication options and, in my view, one of them is the obvious choice over the other for the reasons which follow. Thus, even if it might be said that exercising a choice between disapplication options was beyond the competence of the UK courts in this context, I am in a similar position in relation to selecting one of the disapplication options over the other as was the court in applying a conforming interpretation in each of Prudential and Routier;

(e)          by way of expanding on the latter statement, notwithstanding that it gives rise to an outcome which is more beneficial to the Appellant and detrimental to the Respondents than the outcome for which the Appellant has argued in this case, disapplication option 1 is, in my view, plainly the appropriate disapplication option to adopt in this context.  I say that because it involves disapplying, in the appropriate circumstances, the restriction in Section 171(1A)(b) of the TCGA - which imposes the requirement that the transferee must be within the UK tax net - that constitutes the infringement of the relevant EU freedom in this case; 

(f)           putting this another way, the UK has disproportionately restricted the freedom of establishment of JTIH in this instance by imposing an immediate tax liability on the Appellant in respect of the disposal of the Galleon shares by the Appellant to JTIH.  The UK cannot therefore be surprised if, as a result of the disapplication of that disproportionate restriction, the Appellant is better off in relation to that disposal than it has submitted it should be;

(g)          moreover, applying disapplication option 1 also means that the disapplication affects only those disposals where assets leave the UK tax net and an immediate charge to tax would constitute a restriction on an EU freedom.  Disapplication option 3 would have much more far-reaching consequences and is harder to justify in terms of curing the existing disproportionate restriction on the relevant EU freedom; and

(h)          I am reinforced in this conclusion by the statement by Lord Walker in Fleming at paragraph [49] to the effect that the process of disapplication "involves the identification of the class or classes of taxpayers who are so circumstanced that the offending provisions must not be invoked against them, either in particular cases or at all". It seems to me that disapplication option 3 would involve disturbing the provisions of UK law which provide for intra-group disposals to transferees within the UK tax net to be made without crystallising either a gain or a loss.  Such transferees are not the class of taxpayers which is circumstanced such that "the offending provisions must not be invoked against them".  On the contrary, the class of taxpayers which is relevant in this regard is disponors making intra-group disposals of assets to transferees which are not within the UK tax net. On that basis, it seems to me that disapplication option 3 would involve the wrong form of disapplication.  In contrast, disapplication option 1 would prevent intra-group disposals to transferees which are not within the UK tax net from giving rise to a gain or a loss and would involve not invoking the offending provision - ie the requirement in Section 171(1A) of the TCGA that the transferee needs to be within the UK tax net - in the appropriate circumstances.

Conclusion in relation to the 2014 Disposal

The 2011 Disposal

Which freedoms?

Freedom to move capital

(a)          the disposal of the Brands and related assets by the Appellant to JTISA was not a movement of capital at all because a simple transfer of intangible assets for full consideration is not a capital movement;

(b)          in any event, the Disposal did not fall within any of the headings in the Nomenclature apart from "XIII - OTHER CAPITAL MOVEMENTS - F Miscellaneous". It did not fall within "I - DIRECT INVESTMENTS" because the critical feature of that category is the intention to create lasting economic links between the person providing the capital and the entrepreneur to whom the capital has been made available and not to the links between the entrepreneur to whom the capital has been made available and the assets representing that capital - in that respect, see the CJEU decision in Holböck. It also did not fall within "XIII - OTHER CAPITAL MOVEMENTS – D" because that category is confined to intangible assets associated with the rights of authors;

(c)          as regards any capital movement which comprises a direct investment in JTISA, Article 64 of the TFEU does not prevent the UK from applying the Group Transfer Rules in their present form, as the restriction created by those rules was a restriction that existed in UK law on 31 December 1993; and

(d)         the UK is, in any event, entitled under Article 65 of the TFEU to apply provisions of its law which distinguish between taxpayers who are not in the same situation with regard to residence or the place where their capital is invested and the Group Transfer Rules are doing just that in this context because a Swiss resident company cannot be regarded as being in the same situation as a UK resident company.

(a)           the intangibles regime was introduced after the relevant date and therefore Section 775 in its present form did not exist on the relevant date; and

(b)          although Section 171 and Section 775 give rise to similar outcomes - namely, a deferral of the tax arising on any accrued gain at the point of an intra-group disposal to a transferee within the UK tax net - the way in which Section 775 operates is slightly different from the way in which Section 171 operates. In the latter case, the existence of the disposal is respected but the disposal is treated as taking place on a no gain/no loss basis whereas, in the former case, the transferee steps into the shoes of the disponor and is treated as having held the asset all along, so that the disposal is not respected as such.

"192 As the Court stated in Konle, any national measure adopted after a date laid down in that way is not, by that fact alone, automatically excluded from the derogation laid down in the Community measure in question. If the provision is, in substance, identical to the previous legislation or is limited to reducing or eliminating an obstacle to the exercise of Community rights and freedoms in the earlier legislation, it will be covered by the derogation. By contrast, legislation based on an approach which is different from that of the previous law and establishes new procedures cannot be regarded as legislation existing at the date set down by the Community measure in question (see Konle, paragraphs 52 and 53)."

(a)          it is not permissible to consider whether the Group Transfer Rules create a restriction on the freedom to move capital set out in Article 63 of the TFEU; and

(b)          the Group Transfer Rules in any event do not amount to a restriction on the freedom of JTIH to move capital to JTISA,

the Group Transfer Rules would still amount to a permitted restriction on that freedom by virtue of the standstill in Article 64 of the TFEU.

(a)           the Nomenclature is confined to transactions of a financial nature and does not include transactions in intangibles; or

(b)          the disposal of the Brands and related assets does not fit within any of the categories which are described in the Nomenclature.

(a)           the Appellant is not entitled to rely on Article 63 of the TFEU in relation to the 2011 Disposal because the CJEU case law demonstrates that the Group Transfer Rules must be considered solely in relation to the freedom of establishment in Article 49 of the TFEU; but

(b)          if that were not the case, then the Appellant would not have been able to challenge the imposition of the immediate liability to tax which arose as a result of the 2011 Disposal by relying on JTIH's freedom to move capital to JTISA but it would have been so able by relying on its own freedom to move capital to JTISA.

Freedom of establishment

Is there a restriction?

(a)          a group headed by a non-UK resident company is more likely to make intra-group cross-border disposals than a group headed by a UK resident company.  Thus, whilst a group headed by a UK resident parent company would suffer the same immediate tax liability as did the Appellant, upon making an intra-group disposal to a member of the group located outside the UK tax net, it is more likely that that group's intra-group disposals would be to companies within the UK tax net and therefore benefit from the deferral for which the Group Transfer Rules provide in such cases;

(b)          in any event, a restriction on the freedom of establishment can exist even if there is no discrimination against parent companies which are resident in Member States other than the UK as compared to parent companies which are resident within the UK.  All that is required in order for the restriction to exist is that there is domestic legislation in place which renders the exercise of the freedom of establishment less attractive.  In this case, the existence of the immediate tax charge which arises when a UK resident company such as the Appellant makes an intra-group disposal to a transferee which is outside the UK tax net renders it less attractive for a parent company which is resident in another Member State such as JTIH to exercise its freedom of establishment in the UK by acquiring the Appellant; and

(c)          finally, the decision in Thin Cap is on all fours with the facts in this case because Thin Cap concerned UK legislation which gave rise to certain restrictions on the deductibility of interest paid by a UK resident borrower to a group lender which was outside the UK tax net whereas no such prohibition existed in relation to interest paid by a UK resident borrower to a group lender which was within the UK tax net. As such, the facts in that case were almost identical to the facts in this case in that a benefit available to a UK resident company which borrowed from a group member that was within the UK tax net was denied if the UK resident company in question borrowed instead from a group member that was outside the UK tax net. And, in the course of its decision in that case, the CJEU held that the rules on interest deductibility referred to above amounted to a restriction on the freedom of a parent company which was resident in a Member State other than the UK regardless of whether the interest in question was paid to that parent company, a subsidiary of that parent company resident in a Member State other than the UK or a subsidiary of that parent company resident in a jurisdiction outside the EU. 

(a)          category 1 - restrictions placed by a host Member State on foreign nationals, which involve treating transactions involving those foreign nationals differently from transactions involving only residents of the host Member State; and

(b)          category 2 - restrictions placed by a Member State of origin on nationals of that Member State, which involve hindering the establishment in another Member State by nationals of that Member State.

"34. That argument cannot be upheld.  The national provision at issue in the main proceedings requires that there be a foreign element, clearly relevant to the freedom of establishment conferred by the Treaty, namely, for type A share transfers, the fact that the transferee company is established in another Member State, and, for type B share transfers, the fact that a company established in another Member State has a holding in the transferee company and that this foreign element is the basis for a difference in tax treatment within one Member State."

Thin Cap

(a)          Sections 209(2)(e)(iv) and 209(2)(e)(v) of the ICTA, prior to amendments made to the UK legislation by the Finance Act 1995;

(b)          Section 209(2)(da) of the ICTA, from the date on which that provision was introduced by the Finance Act 1995 until the date in 2004 when the UK transfer pricing rules in Schedule 28AA of the ICTA were amended to extend the same arm's length testing to payments made to companies within the UK tax net as applied to payments made to companies outside the UK tax net; and

(c)          Schedule 28AA of the ICTA, from the date on which that schedule was introduced by the Finance Act 1998 until the date in 2004 referred to in paragraph 296(b) above.

(1) Is it contrary to Articles 43 [EC], 49 [EC] or 56 EC for a Member State ("the State of the borrowing company") to keep in force and apply provisions such as those in sections 209, 212 and schedule 28AA of [ICTA] ("the national provisions") which impose restrictions upon the ability of a company resident in that Member State ("the borrowing company") to deduct for tax purposes interest on loan finance granted by a direct or indirect parent company resident in another Member State in circumstances where the borrowing company would not be subject to such restrictions if the parent company had been resident in the State of the borrowing company?

(2) What difference, if any, does it make to the answer to Question 1:

(a) if the loan finance is provided not by the parent company of the borrowing company but by another company ("the lending company") in the same company group sharing a common direct or indirect parent company with the borrowing company and both that common parent and the lending company are resident in Member States other than the State of the borrowing company?

(b) if the lending company is resident in a Member State other than that of the borrowing company but all common direct or indirect parent companies of the borrowing company and the lending company are resident in a third country?

(c) if all the common direct or indirect parent companies of the lending company and the borrowing company are resident in third countries and the lending company is resident in a Member State other than that of the borrowing company, but advances the loan finance to the borrowing company from a branch of the lending company situated in a third country?

(d) if the lending company and all the common direct or indirect parent companies of the lending company and the borrowing company are resident in third countries?

(3) Would it make any difference to the answers to Questions 1 and 2 if it could be shown that the borrowing constituted an abuse of rights or was part of an artificial arrangement designed to circumvent the tax law of the Member State of the borrowing company? If so, what guidance does the Court of Justice think it appropriate to provide as to what constitutes such an abuse or artificial arrangement in the context of cases such as the present?" (see paragraph [22])

"61 …it must be held that a difference in treatment between resident subsidiaries which is based on the place where their parent company has its seat constitutes a restriction on freedom of establishment, since it makes it less attractive for companies established in other Member States to exercise freedom of establishment and they may, in consequence, refrain from acquiring, creating or maintaining a subsidiary in the Member State which adopts that measure (see Lankhorst-Hohorst, paragraph 32)."

"92 The answer to Questions 1 and 3 must therefore be that Article 43 EC precludes legislation of a Member State which restricts the ability of a resident company to deduct, for tax purposes, interest on loan finance granted by a direct or indirect parent company which is resident in another Member State or by a company which is resident in another Member State and is controlled by such a parent company, without imposing that restriction on a resident company which has been granted loan finance by a company which is also resident, unless, first, that legislation provides for a consideration of objective and verifiable elements which make it possible to identify the existence of a purely artificial arrangement, entered into for tax reasons alone, and allows taxpayers to produce, if appropriate and without being subject to undue administrative constraints, evidence as to the commercial justification for the transaction in question and, secondly, where it is established that such an arrangement exists, such legislation treats that interest as a distribution only in so far as it exceeds what would have been agreed upon at arm's length."

"94 In that regard, it must be noted, first of all, that, as was stated in paragraph 61 of this judgment, national legislation such as the legislation at issue in the main proceedings which, in treating interest paid by a resident subsidiary to a parent company as a distribution, applies a difference in treatment between resident subsidiaries which is based on the place where their parent company has its seat, constitutes a restriction on freedom of establishment, since it makes it less attractive for companies established in other Member States to exercise freedom of establishment and they may, in consequence, refrain from acquiring, creating or maintaining a subsidiary in the Member State which adopts such a measure.

95 It follows that legislation of this kind constitutes a restriction on freedom of establishment which is prohibited, in principle, by Article 43 EC, both where a resident borrowing company is granted a loan by a company which is established in another Member State and has a direct or indirect holding in the capital of the borrowing company, conferring on it definite influence on the decisions of that company and allowing it to determine its activities, and where a borrowing company is granted a loan by another non-resident company which, irrespective of where it is resident, is itself controlled by a company which is resident in another Member State and which has, directly or indirectly, such a holding in the capital of the borrowing company.

96 The answer given to Question 1 therefore also applies to the situation referred to in the first indent to Question 2.

97 As regards the situations referred to in the second, third and fourth indents to Question 2, it must be noted, as was stated in paragraph 36 of this judgment, that Article 43 EC, read in conjunction with Article 48 EC, entails, for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community, the right to exercise their activity in the Member State concerned through a subsidiary, branch or agency.

98 Article 43 EC has accordingly no bearing on the application of national legislation such as the legislation at issue in the main proceedings to a situation in which a resident company is granted a loan by a company which is resident in another Member State and which does not itself have a controlling shareholding in the borrowing company and where each of those companies is directly or indirectly controlled by a common parent company which is resident, for its part, in a non-member country.

99 Where, in such a situation, the Member State which has adopted that legislation treats interest paid by the borrowing company as a distribution, that measure affects freedom of establishment, not as regards the lending company, but only as regards the parent company which enjoys a level of control over each of the other companies concerned allowing it to influence the funding decisions of those companies. In so far as that related company is not established in a Member State for the purposes of Article 48 EC, Article 43 EC is not applicable.

100 For the same reasons, Article 43 EC has no bearing on the application of that legislation to a situation in which both the lending company and the common parent company are resident in a non-member country, nor does it have any bearing on a situation in which a lending company which is resident in another Member State and does not itself control the borrowing company grants the loan through a branch established in a non-member country, where the common parent company is also resident in a non-member country.

101 As regards the other provisions of the Treaty relied on by the claimants in the main proceedings, it must be pointed out that, as was stated in paragraphs 33 and 34 of this judgment, legislation such as the legislation at issue in the main proceedings, which is targeted only at relations within a group of companies, primarily affects freedom of establishment. Even if it were to be accepted that such legislation might have restrictive effects on the freedom to provide services and the free movement of capital, such effects must be seen as an unavoidable consequence of any restriction on freedom of establishment and do not justify an independent examination of that legislation in the light of Articles 49 EC and 56 EC.

102 The answer to Question 2 must therefore be that Article 43 EC has no bearing on legislation of a Member State, such as the legislation referred to in Question 1, where that legislation applies to a situation in which a resident company is granted a loan by a company which is resident in another Member State or in a non-member country and which does not itself control the borrowing company and where each of those companies is controlled, directly or indirectly, by a common parent company which is resident in a non-member country."

(a)          since a parent company which was resident in a jurisdiction outside the EU was not entitled to the benefit of the freedom of establishment, no reliance could be placed on Article 49 of the TFEU in relation to a difference in tax treatment between interest paid to lenders within the UK tax net and interest paid to lenders outside the UK tax net in circumstances where the interest in question had been paid to a subsidiary of that parent company, regardless of whether that subsidiary was resident in a Member State or resident in a jurisdiction outside the EU; but

(b)          since a parent company which was resident in a Member State was entitled to the benefit of the freedom of establishment, reliance could be placed on Article 49 of the TFEU in relation to a difference in tax treatment between interest paid to lenders within the UK tax net and interest paid to lenders outside the UK tax net in circumstances where the interest in question had been paid to a subsidiary of that parent company, regardless of whether that subsidiary was resident in a Member State or resident in a jurisdiction outside the EU.

(a)          the slight difference between the terms of Question (1), as it is set out in paragraph [22], and the way in which Question (1) is answered by the CJEU in paragraph [92].  The latter - already pre-figuring the CJEU's response to Question (2) later in the decision - includes the words "or by a company which is resident in another Member State and is controlled by such a parent company" after repeating the reference to the direct or indirect parent company to which Question (1) was actually confined; and

(b)          the way in which, at the end of its decision, the CJEU formally answers the questions which have been asked of it. In those answers, the CJEU deals with interest paid to Member State-resident parent companies and Member State-resident subsidiaries of Member State-resident parent companies in its answer numbered 1 (reflecting the terms which it used in its answer to Question (1) in paragraph [92] but not the terms of Question (1) itself) and deals with interest paid to subsidiaries (resident both within and outside the EU) of non-Member State-resident parent companies in its answer numbered 2.  Thus, as it happens, neither of those formal answers covers the situation which is analogous to the present case (of a non-Member State-resident subsidiary of a Member State-resident parent company).  More significantly in this context, the CJEU is plainly responding to Question (1) and Question (2) together in its answers numbered 1 and 2.

(a)          there is a double tax convention between the UK and Switzerland, Article 25 of which has been in effect since 1 January 2011 and provides for exchanges of information between the two jurisdictions;

(b)          JTIH, the parent company of JTISA, is resident in the Netherlands and was therefore within the scope of the Multilateral Convention at the time of the 2011 Disposal; and

(c)          the disponor of the intangibles, the Appellant, remains within the UK (so that the deferred corporation tax liability would still be capable of being enforced against it) and has undertaken to provide the Respondents with an annual statement confirming that the intangibles either remain within the sub-group headed by JTIH or have left that sub-group.  In Denmark and A Oy, similar facts to those were considered to be material factors in the CJEU's decision in those cases to treat the immediate imposition of tax as disproportionate - see paragraph [47] in Denmark and paragraph [39] in A Oy.

Conclusion

(a)          in relation to the 2014 Appeal, the EU Law Issue is determined in favour of the Appellant and the 2014 Appeal is upheld; and

(b)          in relation to the 2011 Appeal, the EU Law Issue is determined in favour of the Respondents and the Valuation Issue needs now to be determined.

Right to appeal

than 56 days after this decision is sent to that party.  The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

TONY BEARE

TRIBUNAL JUDGE

RELEASE DATE: 25 MARCH 2019