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Corporate Taxation

Volume 503: debated on Wednesday 6 January 2010

I am announcing today the Government’s intention to present to Parliament proposed legislative changes to the corporation tax rules for capital gains of companies for inclusion in Finance Bill 2010. The changes, which have immediate effect from 6 January 2010, will ensure that a postponed charge on gains arising where assets of an overseas branch are transferred to a non-resident company is brought back into charge at the appropriate time.

The changes will affect UK companies that transfer assets of an overseas branch to a non-resident company in exchange for securities consisting of shares or loan stock. In these circumstances corporation tax on gains arising from the transfer are postponed until the disposal of the securities.

In some situations, however, the security received in exchange can be an exempt asset. Where loan stock is received it can fall within the definition of a Qualifying Corporate Bond (‘QCB’). Section 115 of the Taxation of Capital Gains Act 1992 exempts QCB’s from tax on capital gains. As a result any postponed gain arising from a transfer of an overseas branch’s assets is exempt on the subsequent disposal of a security received in exchange where that security is a QCB. This can create unintended outcomes in the treatment of postponed gains.

The proposed legislative change will correct this defect in the current rules. Where a gain on the transfer of an overseas branch’s assets to a non-resident company in exchange for securities has been postponed, the change will ensure that the disposal of securities will create a deemed gain that is chargeable to tax. Instead of treating the postponed gain as additional consideration for the disposal of an exempt asset, a separate chargeable gain equal to the postponed gain will be deemed to accrue at the time of disposal of the securities. This change will apply where the securities themselves are exempt from a charge to tax.

HM Revenue and Customs will today publish a Technical Note on its website setting out further detail, including the draft legislative amendments.