Share transfer
X and Y, Swedish nationals, proposed to transfer, at acquisition cost, their shares in a Swedish parent company in a group owned in equal shares by X, Y and a third party. The transferee was to be another Swedish company which was a subsidiary of a company owned by X, Y and a third party and which was based elsewhere in the European Community. They applied to the Skatterattsnamnden for a preliminary decision as to the operation of paragraphs 2, 3 and 8 of section 3(1)(h) of the Swedish Law on State Income Tax.
Share transfer
X and Y, Swedish nationals, proposed to transfer, at acquisition cost, their shares in a Swedish parent company in a group owned in equal shares by X, Y and a third party. The transferee was to be another Swedish company which was a subsidiary of a company owned by X, Y and a third party and which was based elsewhere in the European Community. They applied to the Skatterattsnamnden for a preliminary decision as to the operation of paragraphs 2, 3 and 8 of section 3(1)(h) of the Swedish Law on State Income Tax.
The Skatterattsnamnden held that if the transfer of shares were to take place, it should be treated as a transfer for consideration equivalent to market value, and that X and Y should be taxed on a gain equivalent to the difference between the value of those shares and their acquisition cost. It was also held that the exception provided for by Article 58(1)(a) (free movement of capital) was applicable.
The applicants appealed to the Regeringsratten, which referred to the European Court of Justice for a preliminary ruling as to whether Articles 43, 46, 56 and 58 precluded a Member State from permitting a transfer of shares at undervalue to be taxed less advantageously if it were to a legal person domiciled in another Member State, and in which the transferor directly or indirectly had a holding, or to a domestic limited company in which such a legal person had a holding, than if there had been no such foreign interests.
The Court ruled that Articles 43 and 48 did not allow a national provision which excluded the transferor at undervalue of shares in companies from benefiting from deferral tax due on capital gains made on those shares where the transfer was to a foreign legal person in which the transferor directly or indirectly had a holding, provided that that holding gave him influence over the foreign legal person.
The Court ruled further that Articles 56 and 58 precluded a national provision which excluded the transferor at undervalue of shares in companies from the benefit of deferral tax due on capital gains made on shares where the transfer was to a foreign legal person in which the transferor directly or indirectly had a holding which did not give him influence over the foreign legal person.
(X and another v Riksskatteverket, European Court of Justice, 21 November 2002.)
Whose entitlement?
The appellant company claimed writing down allowances on plant and machinery purchased in 1995 for £165 million. The equipment was in the United States, and used in the factories of a large United States manufacturer called CI. The equipment was transferred to CIL, a wholly owned subsidiary of CI, and resident in the United Kingdom. On the same day, the appellant company agreed to buy the equipment from CI for £165 million. The appellant, also on the same day, leased the equipment back to CIL for 30 years and 19 days (the headlease), and then CIL subleased it back to CI for 11 years.
The Revenue rejected the appellant's claim for writing down allowances, and the Special Commissioners (in a decision called Delta Finance Newco) dismissed the company's subsequent appeal.
Mr Justice Etherton said that in order to qualify for writing down allowances for 1995-96, the appellant had to show that it was the legal owner of the equipment. He said that under section 24(1)(b), Capital Allowances Act 1990, the appellant company had indeed become the absolute owner in 1995-96.
He then looked at the term 'leasing' used in section 42(1) which prevents allowances being available for machinery or plant which is leased to a non-resident. He said that the four references to leasing in that subsection were to the lease by the owner of the machinery or plant, thus in a chain of leases, it referred to the headlease.
The words 'is used otherwise than for a qualifying purpose' in section 42(3) were not referring back to the words 'used for the purpose of being leased' to a non-resident in section 42(1), but provided an exception to section 42(3) which went beyond the exceptions at the end of section 42(1). Giving the opening words in section 42(3) their natural meaning, and having regard to the proper interpretation of section 42(1), and to the statutory purpose, 'the lease' referred to in section 42(3)(a) to (e) was the lease by the owner of the machinery or plant, and so, in the case of a chain of leases, the headlease. Thus the appeal failed, since it was common ground that the headlease by the appellant to CIL comprised 'machinery or plant used otherwise than for a qualifying purpose' and satisfied one or more of the provisions of section 42(3)(a) to (e).
The appeal failed.
(BMBF (No 24) Ltd v Commissioners of Inland Revenue, Chancery Division, 26 November 2002.)
