Commentary on Sections Overview Overview Section 122: Tax treated as chargeable in respect of gains on transfer of non-UK business
255.This section provides for tax to be treated as chargeable, for DTR purposes, in respect of certain (a) transfers of non-UK businesses, (b) transfers of parts of non-UK businesses and (c) mergers if tax would have been chargeable but for the Mergers Directive. It is based on section 815A of ICTA.
256.Suppose that a non-UK business is transferred. The Mergers Directive applies if (to summarise the main conditions):
	company A has a permanent establishment in another member State (the host State);
	company A transfers the assets it uses for the purposes of the business it carries on through the permanent establishment to a company (the transferee) resident in a member State other than company A’s home State; and
	the transfer is in exchange for shares or debentures in the transferee.
257.If the Mergers Directive applies, the general rule is that neither company A’s home State, nor the host State, is permitted to tax any capital gain arising on the transfer. But there is an exception if company A’s home State operates, as the United Kingdom does, a system of taxing worldwide profits. If the exception applies, company A’s home State may tax the gain, but only if it allows relief for the tax that would have been charged in the host State but for the Directive. This section gives relief for the notional tax in cases where the United Kingdom is company A’s home State.
258.The legislation needs:
	to specify when the relief is to be given;
	to say how to calculate the relief; and
	to lay down rules determining the corporation tax against which the notional tax can be credited.
259.Sections 140C and 140F of TCGA specify when the relief applies. Section 140C(1) of TCGA deals with the transfer of a non-UK business (as in the example above) or part of a non-UK business, but only if the transferee is resident in an EU member State other than the United Kingdom. Section 140C(1A) of TCGA deals with the transfer of part of a non-UK business. Section 140F of TCGA deals with cross-border mergers of companies etc each resident in an EU member State (but not all resident in the same State). Under subsection (1)(a), section 140C or 140F needs to apply if relief is to be given under subsection (3).
260.Subsection (1)(b) lays down the other condition for relief to be given under subsection (3), namely that (to summarise) the Mergers Directive has sheltered gains from foreign tax.
261.Subsection (3) enables credit relief to be given for notional foreign tax. This section is, however, located in Chapter 3 rather than Chapter 2 of this Part, because its potential application is not limited to credit relief.
262.Subsections (4) and (5) say how the notional foreign tax is to be calculated.
263.Section 140C(3) or, as the case may be, section 140F(3) of TCGA has two consequences. First, the allowable losses accruing to the UK-resident transferor company on the transfer are set off against the chargeable gains so accruing. Second, the transfer is treated as giving rise to a single chargeable gain equal to the aggregate of those gains after deducting the aggregate of those losses. These provisions enable credit relief for the notional foreign tax to be capped by section 42.
264.The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (SI 2007/3186) amended section 140C of TCGA and substituted new section 140F of TCGA. They did not, however, amend section 815A of ICTA. But each of sections 140C and 140F continues to say that if it applies then section 815A of ICTA also applies. Accordingly, this section rewrites section 815A of ICTA in a way which gives effect to that legislative intention.
265.Two verbal changes have been made. First, the definition of “host State” in subsection (2) follows sections 140C and 140F of TCGA in referring to the company’s “business” rather than section 815A of ICTA, which refers to the company’s “trade”. As it happens, section 140F of TCGA always referred to a “business” rather than a “trade”, and both “trade” and “business” on the one hand, and the Mergers Directive’s “branch of activity” on the other, refer to the same thing. Second, subsection (2) refers expressly to section 140C(1A) of TCGA, which was inserted in 2007 and, as noted above, deals with certain transfers of part of a non-UK business. These are drafting clarifications which do not change the law.
266.In the parenthetical descriptions in the definition of “the transfer subsections” in subsection (2), the word “company” appears in inverted commas because it is used in an extended sense. See section 140L of TCGA.