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Thursday, 25th April 2024 |
| Group Relief from Capital Gains Tax has been the subject of amendments in the last two Finance Acts. It is a critically important relief. It now operates with some curious features. |
Several group reliefs
Group relief comes in several forms. There is group relief for losses, stamp duty relief on transfers between group companies, relief on withholding tax payments between group companies, and there is group relief for the purposes of capital gains.
In its original form, group relief for capital gains enabled an Irish resident parent company and it’s Irish resident subsidiaries and sub-subsidiaries etc to transfer assets between each other without being treated as if they had disposed of those assets at open market value. Instead they were treated as disposing of them as between each other at cost. To a degree this enabled a group of companies to operate as if a single economic unit for tax purposes.
This freedom to shift assets about without triggering tax charges was particularly important because it is not possible for a group company to ‘surrender’ capital losses that it may have crystallized, to another group company to be relieved against capital gains accruing in that group company. It is possible to surrender trading losses in this fashion, but not capital losses.
There is of course no good reason for this distinction between different types of losses, but it is an anomaly nearly a quarter of a century old and there seems to be no move to remove it. The anomaly makes it important to be able to move an asset between group companies, so as to crystallize a gain on its disposal to a third party outside the group, in whichever group company happens to have a capital loss available for relief against the capital gain.
The UK has in the last year abolished this particular little ritual dance. It permits the offset of one group members losses against another group members gains, without the formality of the transfer of the asset between the companies prior to it’s disposal to a third party. Hopefully our well entrenched habit of copying UK legislation can be relied on in this case to produce a reform in the next budget.
All Good Europeans
Politically correct readers will realize that all that reference above to ‘Irish Resident’ is old hat. We are all Europeans now. And so said the European Court of Justice in the case of ICI v Colmer, where it denounced similar British provisions as being discriminatory against UK branches of companies resident elsewhere in the EU.
A branch is as much liable to corporation tax as is a resident company so it is certainly anomalous that the resident company should have been allowed relief that was denied to a branch. This problem was corrected by the United Kingdom who did not stop at being good Europeans in their correction. They went the whole hog and extended the relief to UK branches of companies worldwide.
Ireland unfortunately was more cautious. In our first effort at meeting European requirements we allowed the Irish resident subsidiaries of an EU resident parent to avail of group relief for capital gains purposes. However, we refused the extension of the privilege to a branch of an EU resident company. This was very strange because in the same Finance Act that permitted the Irish resident subsidiaries of an EU resident parent to be a group for capital gains purposes, Ireland extended group relief for trading losses not only in that situation, but also to Irish branches of EU resident group members.
Having gained confidence by our initial minor reform, the Finance Act 2001 bit the bullet and now permits Irish resident branches of EU resident group members to be included in the Irish group for capital gains purposes.
Development land
The Finance Act 2001 provision was a relief from corporation tax on companies capital gains. An Irish branch of a non-resident company is liable to corporation tax on capital gains relating to branch assets. However a non-resident company may be liable to Irish capital gains tax (as opposed to corporation tax on capital gains) on certain non-branch assets, principally Irish land.
On the face of it, the extension of group relief to branches for the purposes of corporation tax did not cover non-branch assets which are liable to capital gains tax instead.
To give an actual example the relief would clearly apply to a factory premises owned by a non-resident company carrying on a trade in that factory. But it did not obviously apply to a rental property owned by the same non-resident company. The factory would be a branch asset within corporation tax, but the rental property would not be a branch asset and would be within capital gains tax.
So far you might think it is simple, if rather odd. But there is a twist. Section 649 of the Taxes Consolidation Act requires that a transfer of development land between group members must receive the same treatment as it would were the transfer within the charge to corporation tax rather than capital gains tax. Therefore it would seem that group members resident in other EU states may transfer Irish development land between them within group relief, but may not transfer Irish land which is not development land between them within that relief. This seems a little bizarre. It also seems unlikely to survive a challenge before the European Court of Justice on grounds of discrimination.
Copy UK
Group relief does not involve a forgiveness of taxes. What it involves is a deferral of taxes. It defers tax until such time as a group disposes of an asset to a third party. Against that background, perhaps we should look again at the UK approach. The UK did not confine group relief to local subsidiaries and branches of EU resident group members. They extended it worldwide. In the long run it won’t cost them any tax. But it has made the UK a more business friendly place for mobile international investment. Ireland competes with the UK for US investment into Europe. We need to be sure that our relief’s meet the best the UK can offer.
Jim Clery is a tax partner in KPMG. |
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| Article appeared in the May 2001 issue.
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