Corporation Tax Bill

House of Commons

Session 2008 - 09
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Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
325

(5)
In this section—
“the host contract” means the loan relationship to which the company is
treated as a party under section 415(2) (loan relationships with
embedded derivatives) because of the creditor relationship mentioned
in section 645(2), and
5
“relevant accounting period” means—
(a)
the accounting period in which the disposal in question is
made, or
(b)
any previous accounting period.
Treatment of net gains and losses on disposal of certain embedded derivatives
10
672
Treatment of net gains and losses on disposal of certain embedded
derivatives
(1)
This section applies if—
(a)
a derivative contract is one to which section 648 (creditor relationships:
embedded derivatives which are exactly tracking contracts for
15
differences) applies for an accounting period, and
(b)
the asset representing the creditor relationship mentioned in section
648(2) is disposed of in the accounting period.
(2)
For the purpose of calculating any chargeable gain accruing to the company on
the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA
20
1992 (acquisition costs) are—
(a)
if the sum of G and CV exceeds L, increased by the amount of that
excess,
(b)
if L exceeds the sum of G and CV, reduced by the amount of that excess.
(3)
If the amount of the excess in subsection (2)(b) is greater than the amount of
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expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the
excess which cannot be deducted from the expenditure so allowable is, for the
purpose mentioned in subsection (2), added to the amount of the consideration
for the disposal.
(4)
Sections 37 and 39 of TCGA 1992 (consideration chargeable to tax on income
30
and exclusion of expenditure by reference to tax on income) do not apply in
relation to the disposal.
(5)
For the meaning of G, L and CV, see section 673.
673
Meaning of G, L and CV in section 672
(1)
This section applies for the purposes of section 672.
35
(2)
G is the sum of the amounts of any chargeable gains treated as accruing to the
company under section 641(3)(a) (derivative contracts to be taxed on a
chargeable gains basis) in respect of the derivative contract in each relevant
accounting period.
(3)
L is the sum of the amounts of any allowable losses treated as accruing to the
40
company under section 641(3)(b) in respect of the derivative contract in each
relevant accounting period.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 9 — European cross-border transfers of business
326

(4)
CV is the amount by which the carrying value of the host contract at the date
of the disposal exceeds the carrying value of that contract at the date on which
the company became a party to the creditor relationship mentioned in section
648(2).
(5)
In this section—
5
“the host contract” means the loan relationship to which the company is
treated as a party under section 415(2) (loan relationships with
embedded derivatives) because of the creditor relationship mentioned
in section 648(2), and
“relevant accounting period” means—
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(a)
the accounting period in which the disposal is made, or
(b)
any previous accounting period.
Chapter 9
European cross-border transfers of business
Introduction
15
674
Introduction to Chapter
(1)
This Chapter applies if—
(a)
condition A or B is met, and
(b)
each of the companies mentioned in subsection (2)(a) or (3)(a) makes a
claim under this section,
20

but see section 677 (tax avoidance etc) and section 680 (disapplication of
Chapter where transparent entities involved).
(2)
Condition A is that—
(a)
a company resident in one member State transfers to a company
resident in another member State the whole or part of a business carried
25
on in the United Kingdom,
(b)
the transfer is wholly in exchange for shares or debentures issued by
the transferee to the transferor, and
(c)
immediately after the transfer the transferee is within the charge to
corporation tax.
30
(3)
Condition B is that—
(a)
a company transfers part of its business to one or more companies,
(b)
the transferor is resident in one member State,
(c)
the part of the transferor’s business which is transferred is carried on
by the transferor in the United Kingdom,
35
(d)
at least one transferee is resident in a member State other than that in
which the transferor is resident (and each transferee is resident in a
member State, but not necessarily the same one),
(e)
the transferor continues to carry on a business after the transfer,
(f)
immediately after the transfer each transferee is within the charge to
40
corporation tax, and
(g)
the transfer—

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 9 — European cross-border transfers of business
327

(i)
is made in exchange for the issue of shares in or debentures of
each transferee to each person holding shares in or debentures
of the transferor, or
(ii)
is not so made only because, and only so far as, a transferee is
prevented from so issuing such shares or debentures by section
5
658 of the Companies Act 2006 (c. 46) (general rule against
limited company acquiring own shares) or by a corresponding
provision of the law of another member State preventing such
an issue.
(4)
In this Chapter—
10
“the transfer of business” means the transfer of business mentioned in
subsection (2)(a) or (3)(a),
“transferee” has the same meaning as in subsection (2) or (3), and
“the transferor” has the same meaning as in subsection (2) or (3).
(5)
For the meaning of “company” and “resident in a member State”, see section
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681.
Transfers of derivative contracts at notional carrying value
675
Transfer of derivative contract at notional carrying value
(1)
This section applies if in the course of the transfer of business the transferor
transfers the rights and liabilities under a derivative contract to a transferee.
20
(2)
For the purpose of determining the credits and debits to be brought into
account in respect of the derivative contract in accordance with this Part, the
transferor and the transferee are treated as having entered into the transfer of
those rights and liabilities for consideration of an amount equal to the notional
carrying value of the contract.
25
(3)
For the purposes of this section, the notional carrying value of a contract is the
amount which would have been its carrying value in the accounts of the
transferor if a period of account had ended immediately before the date when
the transferor ceased to be a party to the contract.
(4)
This section is subject to section 676 (transferor using fair value accounting).
30
676
Transferor using fair value accounting
(1)
This section applies instead of section 675 if, in a case where that section would
otherwise apply, the transferor uses fair value accounting as respects the
derivative contract.
(2)
The amount which is to be brought into account by the transferor in respect of
35
the transfer of the rights and liabilities mentioned in section 675(1) is the fair
value of the derivative contract as at the date of transfer to the transferee.
(3)
For any accounting period in which the transferee is a party to the derivative
contract, for the purpose of determining the credits and debits to be brought
into account in respect of the contract in accordance with this Part, the
40
transferee is treated as if it had acquired the contract for consideration of an
amount equal to the fair value of the contract as at the date of transfer to it.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 9 — European cross-border transfers of business
328

Exception for tax avoidance cases and clearances
677
Tax avoidance etc
(1)
This Chapter does not apply in relation to the transfer of business if—
(a)
the transfer of business is not effected for genuine commercial reasons,
or
5
(b)
the transfer of business forms part of a scheme or arrangements of
which the main purpose, or one of the main purposes, is avoiding
liability to corporation tax, capital gains tax or income tax.
(2)
But subsection (1) does not prevent this Chapter from applying if before the
transfer of business—
10
(a)
the companies mentioned in section 674(2)(a) or (3)(a) have applied to
the Commissioners for Her Majesty’s Revenue and Customs, and
(b)
the Commissioners have notified them that they are satisfied that
subsection will not have that effect.
678
Procedure on application for clearance
15
(1)
This section applies in relation to an application under section 677(2).
(2)
The application must be in writing and must contain particulars of the
operations which are to be effected.
(3)
The Commissioners for Her Majesty’s Revenue and Customs may by notice
require the applicant to provide further particulars for the purpose of enabling
20
them to make their decision.
(4)
Such a notice may only be given within 30 days of the receipt of the application
or of any further particulars previously required under subsection (3).
(5)
If such a notice is not complied with within 30 days or such longer period as
the Commissioners for Her Majesty’s Revenue and Customs may allow, they
25
need not proceed further on the application.
679
Decision on application for clearance
(1)
The Commissioners for Her Majesty’s Revenue and Customs must notify their
decision on an application under section 677(2) to the applicant—
(a)
within 30 days of receiving the application, or
30
(b)
if they give a notice under section 678(3), within 30 days of the notice
being complied with.
(2)
If the Commissioners for Her Majesty’s Revenue and Customs—
(a)
notify the applicant that they are not satisfied as mentioned in section
677(2)(b), or
35
(b)
do not notify their decision to the applicant within the time required by
subsection (1),

the applicant may within 30 days of the notification or of that time require
them to transmit the application to the tribunal, together with any notice given
and further particulars provided under section 678(3).
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 10 — European cross-border mergers
329

(3)
In that case any notification by the tribunal has effect for the purposes of
section 677(2)(b) as if it were a notification by the Commissioners for Her
Majesty’s Revenue and Customs.
(4)
If any particulars provided under section 678 do not fully and accurately
disclose all facts and considerations material for the decision—
5
(a)
of the Commissioners for Her Majesty’s Revenue and Customs, or
(b)
of the tribunal,

any resulting notification by the Commissioners for Her Majesty’s Revenue
and Customs or the tribunal is void.
Transparent entities
10
680
Disapplication of Chapter where transparent entities involved
(1)
This Chapter does not apply in relation to the transfer of business if the
transferor is a transparent entity.
(2)
In this section “transparent entity” means a company which is resident in a
member State other than the United Kingdom and which does not have an
15
ordinary share capital.
Interpretation
681
Interpretation
(1)
In this Chapter “company” means any entity listed as a company in the Annex
to the Mergers Directive.
20
(2)
For the purposes of this Chapter, a company is resident in a member State if—
(a)
it is within a charge to tax under the law of the State as being resident
for that purpose, and
(b)
it is not regarded, for the purpose of any double taxation relief
arrangements to which the State is a party, as resident in a territory not
25
within a member State.
Chapter 10
European cross-border mergers
Introduction
682
Introduction to Chapter
30
(1)
This Chapter applies if the following conditions are met—
(a)
conditions A to D,
(b)
in the case of a merger within subsection (2)(a), (b) or (c), condition E,
and
(c)
in the case of a merger within subsection (2)(c) or (d), condition F,
35

but see section 686 (tax avoidance etc) and section 687 (disapplication of
Chapter where transparent entities involved).

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 10 — European cross-border mergers
330

(2)
Condition A is that—
(a)
an SE is formed by the merger of two or more companies in accordance
with Articles 2(1) and 17(2)(a) or (b) of Council Regulation (EC) No.
2157/2001 on the Statute for a European company (Societas Europaea),
(b)
an SCE is formed by the merger of two or more co-operative societies,
5
at least one of which is a society registered under the Industrial and
Provident Societies Act 1965 (c. 12), in accordance with Articles 2(1) and
19 of Council Regulation (EC) No. 1435/2003 on the Statute for a
European Co-operative Society (SCE),
(c)
a merger is effected by the transfer by one or more companies of all
10
their assets and liabilities to a single existing company, or
(d)
a merger is effected by the transfer by two or more companies of all
their assets and liabilities to a single new company (other than an SE or
an SCE) in exchange for the issue by the transferee, to each person
holding shares in or debentures of a transferor, of shares or debentures.
15
(3)
Condition B is that each merging company is resident in a member State.
(4)
Condition C is that the merging companies are not all resident in the same
State.
(5)
Condition D is that immediately after the merger the transferee is within the
charge to corporation tax.
20
(6)
Condition E is that—
(a)
the transfer of assets and liabilities to the transferee in the course of the
merger is made in exchange for the issue of shares or debentures by the
transferee to each person holding shares in or debentures of a
transferor, or
25
(b)
that transfer is not so made only because, and only so far as, the
transferee is prevented from so issuing such shares or debentures by
section 658 of the Companies Act 2006 (c. 46) (general rule against
limited company acquiring own shares) or by a corresponding
provision of the law of another member State preventing such an issue.
30
(7)
Condition F is that in the course of the merger each transferor ceases to exist
without being in liquidation (within the meaning given by section 247 of the
Insolvency Act 1986 (c. 45)).
(8)
In this Chapter, “the merger” and “the merging companies” have the same
meaning as in this section.
35
(9)
See—
(a)
section 683 for the meaning of “the transferee” and “transferor”, and
(b)
section 688 for the meaning of “company”, “co-operative society” and
“resident in a member State”.
683
Meaning of “the transferee” and “transferor”
40
(1)
In this Chapter, “the transferee” means—
(a)
in relation to a merger within section 682(2)(a), the SE,
(b)
in relation to a merger within section 682(2)(b), the SCE, and
(c)
in relation to a merger within section 682(2)(c) or (d), the company to
which assets and liabilities are transferred.
45
(2)
In this Chapter “transferor” means—

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 10 — European cross-border mergers
331

(a)
in relation to a merger within section 682(2)(a), a company merging to
form the SE,
(b)
in relation to a merger within section 682(2)(b), a co-operative society
merging to form the SCE, and
(c)
in relation to a merger within section 682(2)(c) or (d), a company
5
transferring all of its assets and liabilities.
Transfers of derivative contracts at notional carrying value
684
Transfer of derivative contract at notional carrying value
(1)
This section applies if in the course of the merger a transferor transfers the
rights and liabilities under a derivative contract to the transferee.
10
(2)
For the purpose of determining the credits and debits to be brought into
account in respect of the derivative contract in accordance with this Part, the
transferor and the transferee are treated as having entered into the transfer of
those rights and liabilities for consideration of an amount equal to the notional
carrying value of the contract.
15
(3)
For the purposes of this section, the notional carrying value of a contract is the
amount which would have been its carrying value in the accounts of the
transferor if a period of account had ended immediately before the date when
the transferor ceased to be a party to the contract.
(4)
This section is subject to section 685 (transferor using fair value accounting).
20
685
Transferor using fair value accounting
(1)
This section applies instead of section 684 if, in a case where that section would
otherwise apply, the transferor uses fair value accounting as respects the
derivative contract.
(2)
The amount which is to be brought into account by the transferor in respect of
25
the transfer of the rights and liabilities mentioned in section 684(1) is the fair
value of the derivative contract as at the date of transfer to the transferee.
(3)
For any accounting period in which the transferee is a party to the derivative
contract, for the purpose of determining the credits and debits to be brought
into account in respect of the contract in accordance with this Part, the
30
transferee is treated as if it had acquired the contract for consideration of an
amount equal to the fair value of the contract as at the date of transfer to it.
Exception for tax avoidance cases and clearances
686
Tax avoidance etc
(1)
This Chapter does not apply in relation to the merger if—
35
(a)
the merger is not effected for genuine commercial reasons, or
(b)
the merger forms part of a scheme or arrangements of which the main
purpose, or one of the main purposes, is avoiding liability to
corporation tax, capital gains tax or income tax.
(2)
But subsection (1) does not prevent this Chapter from applying if before the
40
merger—