Foulser & Anor v HM Inspector of Taxes

A tax provision denying hold-over relief because a transferee company is foreign-controlled does not, without more, restrict freedom of establishment. Article 43 of the EC Treaty is engaged only where the legislation impairs the right of a person or company to establish and pursue economic activities in another Member State, including through a subsidiary. An incidental loss of fees for a foreign insurer participating in a tax scheme is insufficient. A general anti-avoidance effect cannot be inferred solely from foreign ownership, but that principle does not resolve a case in which the foreign company has not exercised, or shown an intention to exercise, establishment rights.

The taxpayers appealed from the Special Commissioners’ dismissal of their challenge to the refusal of hold-over relief under Taxation of Chargeable Gains Act 1992, section 165, in relation to gifts of shares to companies forming part of an insurance-bond scheme. The Special Commissioner found that the taxpayers and the Irish insurer had acted together to secure or exercise control of the transferee companies, so that section 167(2) prevented relief.

On appeal, the only issue was whether section 167 was incompatible with Article 43 of the EC Treaty. The taxpayers relied principally on X, Y v Riksskatteverket. The central question was whether applying section 167 restricted the Irish insurer’s freedom of establishment.

1. Appeal dismissed. The Special Commissioner’s findings and conclusions were not challenged. The only issue was the compatibility of section 167 with Article 43 of the EC Treaty.
2. Article 43 protects the right to take up and pursue activities in another Member State without discrimination, including through agencies, branches and subsidiaries. It is the right of establishment itself that must be restricted. The concept ordinarily involves the actual pursuit of economic activity through a fixed establishment for an indefinite period.
3. X, Y v Riksskatteverket was not determinative. That decision concerned statutory rules directed to transfers involving ownership links with a foreign company or its subsidiary. The court did not exclude a possible extension of its principle beyond ownership links, but the present case required proof that the foreign company’s establishment rights were engaged.
4. The Irish insurer had no permanent place of business in the United Kingdom and merely participated in the bond transaction for a fee. The tax disadvantage fell on the taxpayer. The insurer’s lost opportunity to earn a modest fee from similar schemes was only an incidental effect of taxation and did not restrict freedom of establishment.
5. The court therefore rejected the Article 43 challenge. The circumstances did not justify a reference under Article 234 of the EC Treaty.

• High Court (Chancery Division) — Appeal from the Special Commissioners’ decision dated 22 February 2005. The appeal was dismissed.