Foulser & Anor v HM Inspector of Taxes

JUDGMENT

Mr Justice Lawrence Collins:

I Introduction

1. This is an appeal by Mr Brian Foulser and Mrs Doreen Foulser against the decision dated February 22, 2005 of the Special Commissioner (Dr J F Avery Jones) dismissing their appeal against the refusal of hold-over relief under the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”), section 165, and the amendment of their self assessments for 1997-1998, in relation to the gain realised on their shares in BG Foods Ltd (“BG Foods”).

2. Mr Foulser set up BG Foods in 1984 with former colleagues from Nestlé. Mr and Mrs Foulser held about 60% of the shares (51% by Mr Foulser and 9% by Mrs Foulser). The business was successful, and in 1997 an offer of £26 million was made for their shares, almost all of which represented a potentially chargeable gain. The shares were ultimately sold for £27 million in 1998.

3. This appeal relates to whether hold-over relief applies to a gift which, as a step in a marketed scheme for the avoidance of capital gains tax on the anticipated gain, Mr Foulser made of his shares to a shelf company, Lazerman Ltd (“Lazerman”). The same considerations apply to the gift by Mrs Foulser of her shares in BG Foods to Motion Ltd (“Motion”).

4. By TCGA 1992, section 165, if an individual (“the transferor”) makes a disposal otherwise than under a bargain at arm's length of a business asset and a claim for relief is made by the transferor and the person who acquires the asset (“the transferee”) or, where the trustees of a settlement are the transferee, by the transferor alone, then section 165(4) shall apply in relation to the disposal.

5. Section 165(4) provides:

“Where a claim for relief is made under this section in respect of a disposal-

(a) the amount of any chargeable gain which, apart from this section, would accrue to the transferor on the disposal, and

(b) the amount of the consideration for which, apart from this section, the transferee would be regarded for the purposes of capital gains tax as having acquired the asset or, as the case may be, the shares or securities,

shall each be reduced by an amount equal to the held-over gain on the disposal.”

6. By section 166:

“Gifts to non-residents

(1) Section 165(4) shall not apply where the transferee is neither resident nor ordinarily resident in the United Kingdom.

(2) Section 165(4) shall not apply where the transferee is an individual … if that individual …

(a) though resident or ordinarily resident in the United Kingdom, is regarded for the purposes of any double taxation relief arrangements as resident in a territory outside the United Kingdom, and

(b) by virtue of the arrangements would not be liable in the United Kingdom to tax on a gain arising on a disposal of the asset occurring immediately after its acquisition.”

7. By section 167 (which is the section directly relevant on this appeal):

“Gifts to foreign-controlled companies

(1) Section 165(4) shall not apply where the transferee is a company which is within subsection (2) below.

(2) A company is within this subsection if it is controlled by a person who, or by persons each of whom

(a) is neither resident nor ordinarily resident in the United Kingdom, and

(b) is connected with the person making the disposal.

(3) For the purposes of subsection (2) above, a person who (either alone or with others) controls a company by virtue of holding assets relating to that or any other company and who is resident or ordinarily resident in the United Kingdom shall be regarded as neither resident nor ordinarily resident there if

(a) he is regarded for the purposes of any double taxation relief arrangements as resident in a territory outside the United Kingdom, and

(b) by virtue of the arrangements he would not be liable in the United Kingdom to tax on a gain arising on a disposal of the assets.”

8. By TCGA 1992, section 286(7), any two or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company. Control is defined in the Income and Corporation Taxes Act 1988, section 416:

“(2) … a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire─

(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or

(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or

(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company …”

9. For this purpose control means shareholder control: Steele v EVC International NV [1996] STC 785, 794-5.

10. On this appeal, Mr and Mrs Foulser have raised, without objection from the Revenue, a point of law concerning the compatibility of TCGA 1992, section 167(2), with Article 43 of the EC Treaty on freedom of establishment. The point was raised by on behalf of Mr and Mrs Foulser on the third day of the hearing before the Special Commissioner, who refused to permit it to be argued. Mr and Mrs Foulser contend that section 167 is to be given no effect because it restricts the right of establishment of Irish Life International Ltd (“Irish Life”) contrary to Article 43, which provides:

“ … restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms … under the conditions laid down for its own nationals by the law of the country where such establishment is effected …”

11. By Article 48:

“Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.

…”

II The scheme

12. Mr Foulser consulted MT Management Ltd (“MTM”) concerning mitigation of capital gains tax following the offer for the shares. MTM proposed the scheme which was ultimately adopted, for a fixed fee, together with an additional fee of 2.5% of the tax saving resulting from the scheme.

13. The scheme involved the following steps. Mr and Mr Foulser each set up an Isle of Man settlement. MTM were the trustees. MTM acquired a newly-formed (off the shelf) parent company and subsidiary company for each settlement. Mr and Mrs Foulser each took out an insurance bond called a Personal Portfolio Bond (“the Bond”) with Irish Life for £5,000 each, and assigned the Bonds to the subsidiary companies in the settlements.

14. According to the literature accompanying the Bond, Irish Life is incorporated in the Republic of Ireland and is authorised to conduct business within the Dublin International Financial Services Centre. It does not maintain a permanent place of business in the United Kingdom. It is a member of the Irish Life marketing group which includes City of Westminster Assurance Co Ltd, which is registered in England, and Irish Life Assurance plc, which is incorporated in Ireland and registered in England as a branch. The Bond is not available to residents of the Republic of Ireland.

15. The benefits of the Bond were determined by reference to the value of the relevant fund, the assets of which could be determined by the Bondholder and which were owned legally and beneficially by Irish Life.

16. The proposal forms for the Bonds requested the appointment of UFC Ltd as investment adviser. UFC Ltd was a company owned by Mr Johns, Mr Foulser’s investment adviser.

17. Irish Life acquired an off the shelf UK company within each Bond (“the underlying company”). The underlying companies, Lazerman in the case of Mr Foulser’s shares and Motion in the case of Mrs Foulser’s shares, had originally been acquired by MTM, who asked the formation agents to bill Allied Dunbar, which was at the time expected to be the entity issuing the bonds. Subsequently, Irish Life acquired them for £200 each. In this judgment I shall refer in the main to the scheme for Mr Foulser only. The same considerations apply to the scheme for Mrs Foulser.

18. The value of the Bond was dependent on the injection of value into Lazerman by transfer of the BG Foods shares. Irish Life acquired Lazerman as an asset of the Bond, solely to facilitate Mr Foulser’s scheme. Once Irish Life had acquired Lazerman, Mr Foulser signed a deed of gift of 51,000 shares in BG Foods to Lazerman. The Bond was itself assigned and, through a chain of shelf companies notionally administered by staff of MTM (but which did nothing apart from facilitate the scheme), was ultimately owned by the offshore trust established for the benefit of Mr Foulser (the Priory Trust).

19. On November 2, 1998 the agreement for the sale of Lazerman and Motion to an independent third party was signed. In buying Lazerman (and Motion), the purchaser obtained control of, and obtained the value of, the BG Foods shares which were contained within the Lazerman/Motion “wrapper”.

III The Bond

20. The Bond was not a unit trust where investment management decisions are made by the institution. The explanatory material says (a) “clients and their advisers choose the assets to be invested in The International Private Portfolio Bond from a wide range of options”; and (b) “From time to time the client, or their investment adviser, may wish to alter the composition of the fund. All that is required is to advise Irish Life International of the purchases and sales to be effected.”

21. The policy conditions of the Bond provide that they form an assurance policy issued in the Republic of Ireland by Irish Life, and governed by Irish law. In consideration of the payment to Irish Life of the premiums, Irish Life will pay to the Bondholder the benefits set out in the conditions and in the schedule; and where the payment is comprised of investments, the premium is calculated by reference to an independent valuation of the investments at the time they are transferred to Irish Life (Condition 1).

22. Irish Life does not provide any investment advice. The investment adviser is appointed by the Bondholder (Condition 2). Additional conditions covering the acceptance by Irish Life of private company shares provide that (a) where private company shares are accepted, an inception value is supplied by the auditors of the company and will normally represent the net asset value of the company; (b) Irish Life does not provide directors, and the shares are held solely as an investment in the fund to which the policy is to be linked; (c) Irish Life does not undertake any day-to-day management, and does not take any responsibility for the value of the shares; (d) Irish Life will not provide any warranties in connection with the sale, and requires from the directors an indemnity in respect of the consequences of any acts or omissions of the directors.

23. The assets within the Fund were determined by the Bondholder and his investment adviser. Condition 3 of the Bond provides as follows:

“The Policy will be linked to a fund (the ‘Fund’) established when the Policy comes into force. No other Policies will be linked to that Fund. Each fund is a separate and identifiable fund forming part of the Life Assurance Fund of the Company. Each fund is divided into units of equal value.

The assets of the Fund which are owned directly and for the avoidance of doubt include assets owned by any investment vehicle or other legal entity within the Fund will be determined by the Proposer and his Investment Adviser, if any, subject to Condition 8 below and any other terms and conditions laid down by the Company from time to time. The amount of the benefits payable under the Policy will be calculated by reference to the aggregate value of the assets which are legally and beneficially owned by the Company and which are specified from time to time for the purpose of the Policy (the ‘Fund’). For the avoidance of doubt the Proposer will have no right or interest of any kind in or over the assets in the Fund and the Company will have full control over any company shares which are comprised in the Fund, however, this shall not affect the policyholders right to surrender or statutory cancellation rights in respect of the policy.”

24. By Condition 4:

“The Company will allocate units of the Fund to the Policy. the Premiums will not actually buy units and the Proposer does not own units (as would be the situation in the case of a unit trust). Instead, unit-linking means that the Policy is linked to the value of units solely for the purpose of determining its value.

The value of units allocated to the Fund on the Date of Commencement will equal the Premium multiplied by the Allocation Percentage as shown in the Schedule.

At any time or times an Additional Premium may be paid within the limits and subject to such terms and conditions as are applied by the Company at the time the Additional Premium is paid. Unit allocation in respect of the Additional Premium will be subject to the terms available at the time the Additional Premium is paid.

25. Valuations of private company shares were to be made by the company’s auditors. By Condition 6:

“The assets of the Fund will be valued on days (each called a ‘Valuation Day’) to be determined at the Company’s discretion but no less than four times each year. The Valuations will take into account uninvested cash, accrued investment income and accrued charges. The Valuation of the Fund will be the net amount of money which in the opinion of the Valuers would be received, if the investments of the Fund (net of all borrowings) were realised.

The units of each fund will be valued on each Valuation Day. The Unit Price is calculated by dividing the results of the Valuation by the number of units allocated to the Fund at that time.

For the purpose of valuing private company shares, the value of such shall be calculated by reference to the latest available share valuation provided by the auditors of the private company. Such valuations shall be provided no less than annually.

If the Valuation of the Fund is lower than the minimum value then acceptable to the Company the Proposer will be obliged to encash the Policy in accordance with Condition 7.1 below or alternatively he may choose to pay an Additional Premium into the Policy. The minimum value at the time of issue of this Policy is Stg£5,000/US$7,500 but may be changed by the Company from time to time.”

26. By Condition 7 it is provided that the policy may be fully encashed at any time, and the “encashment value” will be the policy value on the valuation day following the receipt by the company of its required written notification less the encashment charge. The policy value will reflect the cash amounts realised on selling all the investments of the fund and after taking into account all the charges relating to the sale of the investment.

IV Special Commissioner’s decision

27. The Special Commissioner held that Irish Life and Mr Foulser acted together to secure and exercise control of Lazerman and were therefore connected persons, so that TCGA 1992, sections 167(2) and 286(7), applied to prevent hold-over relief applying on the gift of the BG Foods shares to Lazerman.

28. The Special Commissioner accepted that the relevant test was whether, as 100% shareholder, Irish Life controlled Lazerman because it was able to exercise control over Lazerman’s affairs and whether Irish Life was connected with Mr Foulser within any definition of connected persons in section 286, the applicable one being that they were acting together to secure or exercise control of Lazerman.

29. The legal position created by the scheme was that Irish Life became the legal and beneficial owner of the underlying company within the Bond, which in turn was the legal and beneficial owner of the BG Foods shares; but the Bondholder (the subsidiary company ultimately owned by the settlement), through the contractual arrangement of the Bond, held contractual rather than ownership rights representing the entire value of the BG Foods shares. By entering into the arrangements, Mr and Mrs Foulser changed from being owners of their BG Foods shares to being life tenants under the settlements, which ultimately held contractual rights equivalent in value to their BG Foods shares.

30. Irish Life, as the issuer of the Bond, had no real economic interest in the BG Foods shares because contractual rights of equivalent value were held by the Bondholder. Irish Life’s interest was essentially in the annual fees. It would do what it was told by the Bondholder or the investment adviser in dealing with the funds held within the Bond. The change in Mr and Mrs Foulser’s position by entering into the arrangements was therefore not significant in economic terms. While they were no longer owners of the BG Foods shares, Irish Life had no interest in exercising rights of ownership and would act on the instructions of the Bondholder, a company owned ultimately by a settlement of which they were life tenants.

31. Mr Foulser effectively made the shareholder decisions. Messrs Rooks Rider were not instructed as solicitors on the sale of the BG Foods shares by Irish Life until after the Bondholder instructed Irish Life to instruct them. There was no record of Mr Foulser keeping Irish Life (or the Bondholder) informed about the sale negotiations; he made a number of shareholder-type decisions without reference to them, including deciding to proceed with the existing offer when there was a higher one, and rejecting a request for a price reduction. There was no record of Mr Foulser reporting the final result of his negotiations with a recommendation to sell; Rooks Rider (then acting for Irish Life) sent them the contract for signature with some explanations which read as if they were informing Irish Life about the details of the contract for the first time. The directors of the Bondholders instructed Irish Life that the sale price was acceptable and in their best interests, but there is no information as to how it formed that view and there are no minutes to show any consideration of the sale agreement, and they took no advice. 3i Group plc, who were involved in negotiations, treated Mr Foulser as the shareholder, and described him as one of the pivotal parties. Mr Foulser gave warranties and thereby enabled the sale to go through.

32. Mr Foulser, both for himself and on behalf of Mrs Foulser, went far beyond just acting as a director negotiating a sale and making a recommendation to the shareholders of the underlying companies. He made all the decisions relating to the sale. Irish Life, who had no real economic interest in the shares, and the Bondholder, who had the contractual interest, made none of them. In spite of the fact that there seems to have been no direct communication between Mr Foulser and Irish Life, in negotiating and ultimately entering into the sale, Mr Foulser (for himself and on behalf of Mrs Foulser) and Irish Life were acting together to exercise control of the underlying companies. Either on that basis, or on the basis that they acted together to secure control of the underlying companies, Mr and Mrs Foulser and Irish Life were therefore connected persons and section 167(2) applied to prevent hold-over relief from applying on the gift of shares.

V The appeal

33. There is no appeal from the Special Commissioner’s findings of fact or law. The only question raised in the notice of appeal and in the arguments before me is the compatibility of TCGA 1992, section 167, with Article 43 of the EC Treaty.

Mr and Mrs Foulser’s Submissions

34. Mr and Mrs Foulser argue that the application of section 167 is unlawful because it restricts the right of establishment of Irish Life, an Irish company, contrary to Article 43. Section 167 is a general provision excluding the tax advantage whenever the transferee is foreign-controlled. This goes beyond any legitimate aim to prevent abuse or avoidance. The provision does not allow the national court to take account of the particular circumstances. It applies whatever the outcome on the notification of the taxpayer. The application of section 167 would in any case not pursue a legitimate aim. The case is indistinguishable from Case C-436/00 X, Y v Riksskatteverket [2002] ECR I-10829, [2004] STC 1271.

35. In that case Swedish legislation provided (inter alia) that a transfer at an undervalue to a foreign company in which the transferor had an interest would be treated as a transfer at market value, and the same would apply in the case of a transfer to a Swedish company in which such foreign person had a holding. The European Court decided that Articles 43 and 48 EC precluded such a provision because it restricted the right of establishment of the foreign company in Sweden. It excluded the transferor at undervalue of shares from the benefit of deferral of 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 definite influence over the company's decisions and allowed him to determine its activities, or to a Swedish limited company which was a branch of such a foreign legal person.

36. Such a general restriction on transfers to companies of one Member State by nationals of another Member States is a clear abuse of the right of freedom of establishment. Section 167 is a general provision excluding any case where the transferee is a company controlled by non-residents. Like the Swedish rule it is in direct conflict with freedom of establishment.

37. The mere fact that Mr and Mrs Foulser gain a UK tax advantage by transferring the shares to an Irish company does not preclude the application of Article 43. It is not a wholly artificial situation - there is a real transaction consisting in the transfer of the shares to an Irish insurance company. It is true that the transaction offers certain UK tax advantages and entails a loss of Revenue to the UK but this is not enough to justify interference with the right of establishment of the Irish company. The fact that the shares are transferred to a company which is not subject to UK legislation but is subject to the legislation of another Member State does not of itself involve tax avoidance. The fact that the Irish company is subject to a favourable tax regime is irrelevant. It is established in Ireland and is entitled to trade with the UK taking advantage of the local cost structure, including the tax regime.

38. It is contrary to Article 43 for tax legislation to deny relief for a transfer to a company because it is foreign-owned. Although tax legislation may target purely artificial schemes, tax evasion or tax fraud cannot be inferred generally from the fact that the transferee company or its parent company is established in another Member State and cannot justify a fiscal measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty.

Revenue’s submissions

39. The argument for the Revenue is that Irish Life’s rights under Article 43 are irrelevant to this case. It was not exercising any rights under Article 43 but simply participating in a contractual transaction for a fee. It was not a party to the proceedings before the Special Commissioner and is not before the court. Case C-436/00 X, Y v Riksskatteverket [2002] ECR I-10829, [2004] STC 1271 does not, in any event, determine the Article 43 point, because it is concerned with transfers to an entity in which the transferor has a holding. But even if this is wrong, and no ownership rights on the part of the transferor in the transferee are required, there is still no (or no sufficient) inhibition on Irish Life’s right of establishment because it is not receiving the shares in BG Foods in its own right, as a contribution to its working capital. Although Irish Life owns Lazerman which owns the shares in BG Foods, Irish Life always has an obligation to the Bondholder of matching value through the contractual terms of the Bond. Any fiscal disadvantage from disallowance of the relief is suffered only by Mr Foulser.

40. The right of establishment requires the removal of restrictions on the right of individuals and companies to maintain a permanent or settled place of business in another Member State. Establishment is the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period: Case C-221/98 R v Secretary of State for Transport, ex p. Factortame [1991] ECR I-3905, para 20.

41. This case raises no question concerning the ability of Irish Life to establish and manage its enterprise within the UK. It has never been contended (by Mr and Mrs Foulser or by anybody else) that Irish Life had any such intention and there was no evidence and there is no finding of fact to any such effect.

42. Mr and Mrs Foulser, if they had wanted to ventilate the issue, should have done so before the Special Commissioner, adducing evidence as to the true commercial position, and actually raising the question whether Irish Life was exercising (or seeking to exercise) rights of establishment. Then the point could have been investigated and tested.

43. The only interest of Irish Life was in the annual fees paid by the Bondholder. The question whether TCGA 1992, section 167(2), constitutes an unjustified inhibition on the freedom of Irish Life to establish and manage its enterprise within the UK is entirely hypothetical. The court does not (and should not) rule on hypothetical questions concerning the rights of those who are not before it, in the absence of findings of fact and in the absence of a meaningful dispute on the issue: Ainsbury v Millington (Note) [1987] 1 WLR 379; R (Rusbridger) v Attorney General [2004] 1 AC 357. So also the European Court will refuse to rule on general or hypothetical questions: e.g. Case C-318/00 Bacardi-Martini SAS, Cellier des Dauphins v Newcastle United Football Company Ltd [2003] ECR I-905, paras 42-43; Case C-343/90 Lourenço Dias [1992] ECR 4673.

44. In the alternative, the court is invited to refer a question concerning the interpretation of Article 43 to the European court for a ruling under Article 234 of the EC Treaty. The court could not with complete confidence and no real doubt resolve any issues of Community law raised by this appeal in Mr and Mrs Foulser’s favour: R v International Stock Exchange, ex p. Else (1982) Ltd [1993] QB 534.

VI Case C-436/00 X, Y v Riksskatteverket [2002] ECR I-10829, [2004] STC 127

45. This ruling is central to Mr and Mrs Foulser’s argument. The ruling was made in proceedings brought by two Swedish nationals, X and Y, against a preliminary decision given by the Skatterättsnämnden (Swedish Revenue Law Commission) concerning the exclusion of X and Y, as transferors at undervalue of shares in companies, from the benefit of deferral of tax due on capital gains made on those shares through the application of a national rule providing for such exclusion where the transfer is to a foreign legal person in which the transferor directly or indirectly has a holding or to a Swedish limited company in which such a foreign legal person either directly or indirectly has a holding.

46. X and Y proposed to transfer, at acquisition cost, their shares in X AB, a Swedish company, to Z AB, another Swedish company, which was in turn a subsidiary of Y SA, a Belgian company. X AB was the parent company in a group owned in equal shares by X and Y and a Maltese company (in which X and Y had no proprietary interest). Y SA was also a parent company owned by the current owners of X AB.

47. The Swedish tax legislation provided:

“A transfer of an asset … without consideration to a Swedish limited company in which the transferor or his kin directly or … indirectly holds shares shall be treated as though the asset were disposed of for a consideration equivalent to cost. The same shall apply to a transfer for a consideration which is less than both the market value of the asset and cost …

A transfer of an asset … for no consideration or for a consideration which is less than the market value of the asset, to a foreign legal person in which the transferor or his kin directly or indirectly has a holding shall be treated as though the asset were disposed of for a consideration equivalent to the market value. The same shall apply in the case of a transfer to a Swedish limited company in which such a foreign legal person either directly or indirectly has a holding.”

48. In its preliminary decision, the Skatterättsnämnden held that if the transfer of shares in X AB were to take place it should be treated as a transfer for consideration equivalent to market value and that X and Y should thus be taxed on a gain equivalent to the difference between the value of those shares and their acquisition cost. The Skatterättsnämnden held that freedom of establishment was not at issue.

49. The question referred by the Swedish court was:

“In a situation such as that in the present case do Articles 43, 46, 48 … EC preclude the application of a Member State’s legislation which – like the relevant Swedish legislation – has the effect that a capital contribution in the form of a transfer of shares at undervalue is taxed less advantageously if the contribution is to a legal person which is domiciled in another Member State and in which the transferor directly or indirectly has a holding or to a domestic limited company in which such a legal person has a holding, than would have been the case if there had been no such foreign proprietorial interests.”

50. The European Court said that, in the Swedish legislation, three types of share transfer at less than market value could be distinguished on the basis of the relationship between the transferor and the transferee:

(A) transfers to a foreign legal person in which the transferor or his kin directly or indirectly has a holding (Type A share transfers);

(B) transfers to a Swedish limited company in which such a foreign legal person either directly or indirectly has a holding (Type B share transfers); and

(C) transfers to a Swedish limited company other than those described in the previous indent and in which the transferor or his kin directly or indirectly has a holding (Type C share transfers).

51. The case engaged the EC Treaty because the Swedish tax law required that there be a foreign element, clearly relevant to the freedom of establishment conferred by the Treaty, namely, for Type A share transfers, the fact that the transferee company was established in another Member State, and, for Type B share transfers, the fact that a company established in another Member State had a holding in the transferee company and that this foreign element was the basis for a difference in tax treatment within one Member State.

52. As regards Type A share transfers, the Swedish law entailed a difference in treatment in refusing to the transferor the benefit of deferring capital gains tax made on shares transferred at undervalue, with a consequential cash flow disadvantage for him, where the transferee company in which the transferor has a holding was established in another Member State. Therefore, refusal of the tax advantage in question on the ground that the transferee company in which the taxpayer has a holding was established in another Member State, was likely to have a deterrent effect on the exercise by that taxpayer of the right conferred on him by Article 43 EC to pursue his activities in that other Member State through the intermediary of a company. The inequality of treatment constituted a restriction on the freedom of establishment of nationals of the Member State concerned (and on that of nationals of other Member States resident in that Member State), who had a holding in the capital of a company established in another Member State, provided that that holding gave them definite influence over the company’s decisions and allowed them to determine its activities. It was for the Swedish court to ascertain whether that condition was fulfilled.

53. As regards Type B share transfers, the Swedish law constituted a restriction on the freedom of establishment of a company, established in another Member State (in that case a Belgian limited company), and treated, within the meaning of Article 48 EC, in the same way as a natural person who is a national of that Member State who wished to pursue his activities through the intermediary of a branch in the Member State concerned. Acceptance of the proposition that the Member State concerned might refuse the benefit of deferring capital gains tax, thus depriving the transferor of a cash flow advantage, by reason of the fact that the parent company of the transferee company is situated in another Member State would deprive Article 43 EC of all meaning: citing Joined Cases C-397/98 and C-410/98 Metallgesellschaft Ltd v IRC [2001] ECR I-1727, [2001] STC 452, para 42.

54. Accordingly, application of the Swedish law, both for Type A share transfers and for Type B share transfers, involved a restriction on the exercise of freedom of establishment conferred by the Treaty. The Swedish law, insofar as it excluded categorically and generally any Type A or Type B share transfer from the benefit of deferral of tax, did not allow the national courts to make a case-by-case analysis taking account of the particular features of each case.

55. The criterion on the basis of which the Swedish law excluded Type A and Type B share transfers from that tax advantage - namely the fact that the transfer was to a company established under the legislation of another Member State or a branch set up in Sweden by such a company - related to the exercise of the freedom of establishment guaranteed by the Treaty and could not, therefore, in itself, constitute an abuse of the right of establishment. Accordingly, refusal by a Member State of a tax advantage in respect of any transfer at undervalue of shares to a company established under the law of another Member State or to a branch of that company established on its territory could not be justified.

56. A restriction on freedom of establishment could be justified only if the Swedish law pursued a legitimate aim compatible with the Treaty and was justified by pressing reasons of public interest. Even if that were so, it would still have to be of such a nature as to ensure achievement of the aim in question and not go beyond what was necessary for that purpose. The reduction in tax revenue which would be likely to result from the granting of that advantage to Type A and Type B share transfers could not be regarded as a matter of overriding general interest which could be relied upon in order to justify unequal treatment that was, in principle, incompatible with Article 43 EC.

57. The need to safeguard the cohesion of a tax system and the effectiveness of fiscal supervision constituted overriding requirements of general interest capable of justifying a restriction on the exercise of fundamental freedoms guaranteed by the Treaty. But the Swedish law was not specifically designed to exclude from a tax advantage purely artificial schemes designed to circumvent Swedish tax law, but concerned, generally, any situation in which, for whatever reason, the transfer at undervalue is to a company established under the legislation of another Member State or a branch set up in Sweden by such a company. Tax evasion or tax fraud could not be inferred generally from the fact that the transferee company or its parent company is established in another Member State and could not justify a fiscal measure which compromised the exercise of a fundamental freedom guaranteed by the Treaty.

58. In any event, the Swedish law was not capable of achieving the objective it was supposed to pursue, that is to say, ensuring that the transferor is actually taxed in Sweden on gains made on shares transferred, particularly if the transfer is made prior to his definitive move abroad. In the case of Type C share transfers, the transferor benefited in any event from a deferral of tax on gains made on shares transferred. The Swedish Government was unable to establish that, for this type of transfer, there were objective differences in the situation which would imply that the potential risk, for the purposes of taxation of the transferor in Sweden, inherent in a definitive move abroad by that transferor, is of an essentially different nature from that for Type A and Type B transfers.

59. The ruling was that:

“Articles 43 EC and 48 EC preclude a national provision such as that at issue in the main proceedings, which excludes the transferor at undervalue of shares in companies from the benefit of deferral of tax due on capital gains made on those shares where the transfer is to a foreign legal person in which the transferor directly or indirectly has a holding ─ provided that that holding gives him definite influence over the company's decisions and allows him to determine its activities ─ or to a Swedish limited company which is a branch of such a foreign legal person.”

VII Conclusions

60. Article 43 is a fundamental principle of European law, which has direct effect in United Kingdom law: European Communities Act 1972, s. 2; Joined Cases C-397/98 and C-410/98 Metallgesellschaft Ltd v IRC [2001] ECR I-1727, [2001] STC 452, para 41.

61. Where a rule of Community law has direct effect, United Kingdom legislation has to be read as if a section were incorporated enacting that its provisions were to be without prejudice to the directly enforceable rights of companies incorporated in Member States: Imperial Chemical Industries plc v Inspector of Taxes [1999] 1 WLR 2035, 2041 (H.L.).

62. Freedom of establishment includes the right to take up and pursue activities in other Member States without discrimination, including the establishment of agencies, branches and subsidiaries: Joined Cases C-397/98 and C-410/98 Metallgesellschaft Ltd v IRC [2001] ECR I-1727; [2001] STC 452, para 41; Case C-446/03 Marks & Spencer plc v Halsey (Inspector of Taxes), December 13, 2005, para 30.

63. It has also been said that the concept of establishment involves the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period; Case C-221/89 R v Secretary of State for Transport, ex p Factortame Ltd [1991] ECR I-3905, para 20. It includes the right to set up and manage undertakings in a Member State by a national of another Member State: and a national of a Member State who has a holding in the capital of a company established in another Member State which gives him influence over its decisions and allows him to determine its activities is exercising his right of establishment: Case 251/98 Baars [2000] ECR I-2787, para 22.

64. In C-410/98 Metallgesellschaft Ltd v IRC, ante, the European Court ruled that it was contrary to Article 43 EC for the United Kingdom tax legislation to deprive subsidiaries of foreign companies (but not of United Kingdom companies) of the benefit of paying dividends to a parent company without having to pay advance corporation tax: paras 70-76.

65. So also consortium relief could not be confined to companies controlling, wholly or mainly, subsidiaries whose seats were in the Member State in question, because that would be discrimination against companies which had exercised their right of freedom of establishment: Case C-264/96 Imperial Chemical Industries plc v Colmer plc [1998] ECR I-4695, [1998] STC 874.

66. In the most recent decision, Case C-446/03 Marks & Spencer plc v Halsey (Inspector of Taxes), December 13, 2005, the European Court ruled that the exclusion of group relief advantage in respect of the losses incurred by a subsidiary established in another Member State hindered the exercise by the parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States. It constituted a restriction on freedom of establishment, in that it applied different treatment for tax purposes to losses incurred by a resident subsidiary and losses incurred by a non-resident subsidiary.

67. A national measure which breaches Article 43 in principle has to be shown to be pursuing a legitimate aim which is compatible with the EC Treaty and is justified by pressing reasons of national interest: e.g. Case C-324/00 Lankhorst-Hohorst GmbH v Finanzamt Steinfurt [2002] ECR I-11779, [2003] STC 607; Case C-446/03 Marks & Spencer plc v Halsey (Inspector of Taxes), December 13, 2005. Discrimination might be justified to reduce the risk of tax avoidance, but not where the legislation does not have the specific purpose of preventing artificial arrangements, and applies generally (e.g. to all situations in which the majority of a group’s subsidiaries were established outside the United Kingdom): the establishment of a company outside the United Kingdom did not of itself necessarily entail tax avoidance: Case C-264/96 Imperial Chemical Industries plc v Colmer plc [1998] ECR I-4695, [1998] STC 874, para 26; also Case C-324/00 Lankhorst-Hohorst GmbH v Finanzamt Steinfurt [2002] ECR I-11779, [2003] STC 607, para. 37.

68. I am satisfied that Case C-436/00 X, Y v Riksskatteverket [2002] ECR I-10829, [2004] STC 127 is not determinative of the present appeal. I accept that section 167 has some parallel with Type B transfers, and that it does not allow case by case determination of abuse.

69. Mr and Mrs Foulser argue that the decision is not limited to cases where the transferor and the transferee are connected by ownership, and that references to ownership were inevitable because the Swedish legislation required an ownership connection in both Type A and Type B transfers.

70. It is clear from the Swedish legislation and from the question referred to the European Court that the decision deals only with the situation where the transferor has a holding in a foreign transferee (Type A) or in the foreign parent of a domestic transferee (Type B), and that in each case the European Court was considering transfers to an entity in which the transferor or his kin directly or indirectly has a holding, or to an entity held by such an entity.

71. The European Court held, in relation to Type A transfers, that it was incompatible with Article 43 for Type A transfers to suffer the fiscal disadvantage of disallowance of the relief. It was (for Type A) a restriction on the freedom of establishment of nationals of the Member State who had a holding in the capital of a company established in another Member State, “provided that that holding gives them definite influence over the company’s decisions and allows them to determine its activities” (para 37, citing, inter alia, Case C-251/98 Baars [2000] ECR I-2787). This was because (para 36) it was likely to have a deterrent effect on the exercise by the taxpayer of the right to pursue his activities in the other Member State through the intermediary of a company.

72. In relation to Type B transfers, the European Court emphasised that the relevant freedom was the freedom of a company established in another Member State to pursue its activities in the forum state through the intermediary of a subsidiary. That was why “acceptance … of the proposition that the member state concerned may refuse the benefit of deferring capital gains tax, thus depriving the transferor of a cash flow advantage, by reason of the fact that the parent company of the transferee company is situated in another member state would deprive art 43 of all meaning” (para 38).

73. These observations are reflected in the ruling that Articles 43 and 48 preclude a tax provision which excludes the benefit of deferral of tax due on capital gains “where the transfer is to a foreign legal person in which the transferor directly or indirectly has a holding – providing that that holding gives him definite influence over the decisions of that foreign legal person and allows him to determine its activities – or to a Swedish limited company which is a subsidiary of such a foreign legal person.”

74. The fact that the Swedish legislation required an ownership link does not of itself mean that the principles in the case are limited to ownership links, and I do not rule out the possibility that the principle may be extended beyond links of that kind.

75. Nor do I consider it determinative in favour of the Revenue that there is no appearance by, or evidence from, Irish Life. In some cases, no doubt, restrictions on freedom of establishment would be obvious. Thus, in the context of the prohibition on freedom to provide services (Article 49, formerly Article 59), the European Court has accepted that the recipient of services is entitled under Community law to plead discrimination prohibited by Article 49 even if the victim of the discrimination is the provider of the service: Case C-294/97 Eurowings Luftverkehrs AG v Finanzamt Dortmund-Unna [1999] ECR I-7447, para 46: see Mischo AG, para 27, citing Case 286/82 Luisi and Carbone v Ministero del Tesoro [1984] ECR 377; C-484/93 Svensson and Gustavsson [1995] ECR I-3955.

76. But it is the right of establishment which must be restricted for Article 43 to apply. The decisions largely fall into two categories. The first relates to the right of foreign companies to carry on business through subsidiaries without discrimination in a Member State: Case C-221/89 R v Secretary of State for Transport, ex p Factortame Ltd [1991] ECR I-3905; C-410/98 Metallgesellschaft Ltd v IRC [2001] ECR I-1727, [2001] STC 452; Case C-324/00 Lankhorst-Hohorst GmbH v Finanzamt Steinfurt [2002] ECR I-11779, [2003] STC 607; Case C-436/00 X, Y v Riksskatteverket [2002] ECR I-10829, [2004] STC 127 (Type B transfers). The second relates to the right to establish companies in one Member State unhindered by legislation in another Member State: Case C-264/96 Imperial Chemical Industries plc v Colmer plc [1998] ECR I-4695, [1998] STC 87; Case C-251/98 Baars [2000] ECR I-2787; Case C-436/00 X, Y v Riksskatteverket (Type A transfers); Case C-446/03 Marks & Spencer plc v Halsey (Inspector of Taxes), December 13, 2005.

77. It is clear from C-436/00 X, Y v Riksskatteverket that with regard to both Type A and Type B transfers the Court was concerned with a restriction on the right of a person in one Member State to pursue activities through the intermediary of a company or subsidiary in another Member State (paras 36, 38)

78. The literature accompanying the Bonds makes it clear that Irish Life does not maintain a permanent place of business in the United Kingdom. It refers to another company in the group, City of Westminster Assurance Co Ltd, which is registered in England and to Irish Life Assurance plc, an Irish company with a branch in England, but there is no suggestion that these companies have any connection with the business involved in this case: some fund management activities are said to be carried out by Irish Life Assurance plc, but these Bonds involve no management by Irish Life.

79. Irish Life was simply participating in a contractual transaction for a fee. The fiscal disadvantage from disallowance of the relief is suffered only by Mr Foulser, and the only consequence for companies such as Irish Life is the loss of the fee. In Case C-294/97 Eurowings Luftverkehrs AG v Finanzamt Dortmund-Unna [1999] ECR I-7447 it was held that giving tax advantages to lessees of aircraft leased by lessors established in that Member State and not in respect of leases of aircraft from lessors established in other Member States was an unlawful restriction on the right of freedom to provide services under Article 49. But it has not been argued in this case that section 167 could be a restriction under Article 49 on Irish Life’s right to provide the Bonds for a fee.

80. The only relevant consequence of section 167 is that companies in the position of Irish Life will no longer have the opportunity to earn a (modest) fee on schemes of this kind. Taxation provisions may have any number of incidental effects on the ability of financial institutions and professionals established in other Member States to charge fees, but that cannot of itself engage the right of freedom of establishment. In this case Irish Life’s right to freedom of establishment is not engaged.

81. The appeal will therefore be dismissed.